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The market seems to be in a position to move higher over the near-term as higher prices may be needed to keep the pipeline active. Demand for coffee sees a little less sensitivity to the recessionary economic news than many commodity markets and the longer-term impact of the recession may be to see increased inflationary pressures once the economy bottoms. March coffee inched higher on the session on Friday and managed to hit the highest level since November 10th as the early moderate set-back in prices failed to break Thursday’s lows. The surge higher in gold and other commodity markets, a recovery in the stock market and a surge higher in crude oil helped support the recovery off of the early lows. Talk that the Colombia cash trade remains tight and that European coffee buyers are searching for alternatives helped provide support. In addition, a turn down in the US dollar after a surge higher Thursday night may have helped the market recovery from the lows as well. The outlook for a world production deficit for the coming year remains the foundation of a potential rally into the spring. Colombia cash markets traded as high as 26 cents premium to the May futures contract last week which is up from near a 20 cent premium in late December and near a 9 cent premium back in October. The strong basis indicates firm cash demand. The Commitment-of-Traders reports, released on Friday, showed that trend-following funds were net buyers of 2,986 contracts for the week ending January 20th to reduce their net short position to just 1,217 contracts. Given the recent trend in the market, futures look vulnerable to increased fund buying if resistance levels are violated. The technical action is positive for an uptrend while short-term technical indicators are a bit overbought. The market is coming off of an extreme oversold condition and a 50% retracement of the 2008 break for May coffee leaves a longer-term upside objective of 143.25 with a first retracement objective of 134.20. US ICE daily exchange stocks were down by 5,166 bags to 4.317 million with 13,600 bags pending review. Stocks have been on a decline for much of January and the small amount of coffee pending review suggests more declines ahead.
TODAY’S GUIDANCE: Open interest continues to rise and reached the highest level since late October. Rising open interest on the recent rally despite a hefty net short position by speculators is seen as a positive technical development. Open interest was up more than 3,000 contracts on Thursday to 132,696 contracts.
