Coffee broke through the 400-cent line in New York, and the most heard question in the market is: how far will prices go? The gains have been supported by a tightening supply and driven by a bullish technical and financial bias. Buying movements, in advance of the expiration of the March/25 options next week, served as support for a new surge in prices. The fact is that the lack of selling interest forced buyers to be more aggressive, fueling the bullish rally.
There is a clear disconnection between price movement and fundamental reality, with sustained gains for several trading sessions now due to financial and technical issues. It is as if the market had entered a kind of bullish autopilot, seeking to overcome one bullish challenge after another. This has driven prices to sky-high levels.
The coffee’s fundamental reality indeed remains quite firm. In the domestic physical market, supply remains scarce due to the strong flow of exports and high percentage of sales. SAFRAS, in its latest sales report, indicated that 85% of the current crop have already been sold by growers. The resistance of growers, who are well capitalized and need fewer coffee bags to get liquidity (due to very high prices), contributes to the reduced supply. This cycle helps to fuel the upward price spiral.
However, the gains go beyond these fundamental signs. Coffee in New York is technically stretched, vulnerable to corrections given the growing signs of an overbought market. Despite this, it is increasingly difficult to find someone willing to bet against the rise. Funds, in fact, continue to increase their net long position in coffee on the commodities exchange. Therefore, the market dynamics continue to be driven by buyers, which reinforces the escalation of prices. But for how long? Some claim that even the market is testing its buying strength, seeking its financial limit. This involves the consumer’s ability to pay and the credit capacity of traders to sustain positions, reinforcing the idea that the current coffee market has lost touch with fundamentals and is increasingly driven by financial challenges.
The graphical references indicate new upward targets for the March/25 position at a level close to 428 cents. At the bottom, pay attention to the 400 cents level, as the loss of this important psychological support should accelerate the erasing of part of the gains, with new targets around the graphic supports at 386 and 370 cents. Owing to the intensity of gains, the market indicates the need for some correction. The fact is that, even in a possible corrective scenario, the long-term curve for coffee in New York, respecting these technical ranges, would consolidate the upward change in the market’s operating level, continuing the upward trend.
Pay attention to rollover movements, with the exchange of contracts and the leading role assumed by the May/25 position in NY, given the proximity of the first delivery notice day for the March/25 position, which occurs on February 20.
