Arbitrage Widens In Chase Of The Shorts

The macroeconomic scene was surprised by the BOJ decision to double their monetary base in the next two years to stimulate growth and a little inflation. The BOJ objective is that inflation will reach 2% per year and the influx of money needed could be up to US$ 1.4 trillion.

The European Central Bank kept the interest rates unchanged as expected but signaled that they may reduce from the 0.75 % if necessary (they did say that before, didn’t they?).

In the USA, the job creation in March was the lowest in nine months, disappointing the markets which profited from the recent highs in the stock market.

The main commodities indexes fell between 2.4% and 4%, with a steep drop in the energy complex (gasoline, heating oil and oil), followed by the metals. Coffee in NY, different than imagined, managed to break and stay above US$ 140 cents, even with London losing US$ 2.40 per bag in 5 days.

Funds covering part of their short positions and a bit stronger. Real currency helped the modest price recovery. Some analysts say there is a player trying to provoke a greater repurchase by the funds, which have a gross position of 19.4 million of 60 kg coffee bags short.

In the physical market, bigger lots were traded in Brazil, with the reposition a little wider, and with the other Arabica producers the buying interest is a little far away from the offering levels. A big international dealer mentioned in their report that the losses in Central America due to rust and fungus are not as bad as some say. This does not mean that there will be no losses, but rather that maybe it will be more like 3 million bags and not the 5 million that the more pessimistic ones believe.

The beginning of Spring in the Northern Hemisphere brings a lower demand from roasters, who look for covering for the second half of the year and the first half of 2014.

The proximity of the Indonesian crop and Conillon in Brazil plus the prognosis of rains in Vietnam should all take support from the LIFFE contract and bring more offers in the main origin of the product.

According to the CECAFE Brazil exported 22.95 million bags between July 2012 and Mar 2013. The current figure is lower than the 23.77 million bags exported in the previous crop-year, where the crop was lower than the current one. Talking about crop size, there are some talking about the Brazilian production for 2014/2015…

As a result of the distinct movement of the C and the Robusta in London the arbitrage widened to US$ 49 cents per pound, two weeks after having traded at US$ 35 cents, therefore not being able to stay for too long below the US$ 40 cents, as we had expected.

The volumes traded in NY should increase in the next 2 weeks due to the proximity of the first notice day for May contracts. The spread should widen a bit with the index funds rolling their positions and the low interest for the certified coffees.