Is Coffee Fishing for a Bottom?
???? Fundamentals
Coffee futures have been in steady decline under the pressure of the massive Brazilian crop and uncertain demand. European demand, in particular, has been a major concern for Coffee growers, given the economic situation across the continent. Brazil continues to see favorable weather conditions showing no signs of production letting up.
Colombia continues to recover from the la roya fungus, which infested 40% of the nation’s trees. Roughly half of the trees lost have been replanted, and the government expects production to reach 85-95% of normal production within the next two years.
While Colombia has made huge strides in combating the leaf rust fungus, Central America is bracing for an outbreak. Costa Rica has already declared a state of emergency,and there is buzz that Guatemala and El Salvador also have suffered heavy crop losses. The larger crop in Brazil and Colombia has outweighed the bullish effects of the spread of the deadly fungus in the near-term.
Long-term ramifications paint a more dire outlook, as the depressed price of Coffee could result in Central American nations not having the funds to deal with the outbreak as efficiently as the Colombian government.
As more news emerges from Central American growers, volatility may kick-up significantly and give bulls a bit of traction. Some speculators have been building a large net short position of 36,595 contracts (excluding funds), which is a 29% increase over the prior week. This suggests that the market may be ripe for short-covering.
???? Technical Notes
Turning to the chart, we see that the May Coffee contract bounced sharply yesterday. This could be interpreted as a possible short-term reversal on the daily chart. Prices did manage to trade above previous support (now resistance) at the 150 level in the latter portion of January, before falling back once again. If the market does indeed rebound, it will be interesting to see if this price level is tested once again.
The 14-day RSI reached 10.74 as of the close on Tuesday, showing extremely oversold conditions. This likely contributed to the rebound in prices. On the downside, prices need to remain above the relative low close of 136.95 to avoid potentially triggering additional selling pressure.
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