Eurodollars: Eurodollar interest rate futures are a primary battlefront between short-sellers expecting higher U.S. rates and economic growth vs. the strong dollar/slow global growth camp. Currently, the commercial trader position is near its midpoint. However, the market itself has fallen 23 points from the all-time high reached this past October. This decline has brought the market down to serious support levels.
Support can be measured technically, with the 90- and 120-week moving averages coming in at 99.245 and 99.20, respectively. The market has found support along this trend in 2011, 2013 and March of 2015. Support also can be measured fundamentally. Domestically, the long bond hasn’t moved since the Fed tightened rates in December while Eurodollars have declined by 20 points creating a genuine bargain. Meanwhile Chinese and European economic slowdowns should keep global rates and inflation low while boosting the U.S. dollar significantly. Further support comes from commercial traders covering short hedges that had been placed too early. Commercial traders sold more than 2.4 million contracts between August of 2014 and March of 2015 between 99.18 and 99.475. Their unwinding of these positions will provide considerable support.
Finally, adding to the 2016 bullish tone is a likely U.S. dollar test of 110. This combination of factors suggests that the interest rate battle, in a world of Chinese and European weakness, is not over in spite of the Fed firing its first shot.
Coffee: Coffee has been in a long downward trend with the last meaningful high in October 2014. However, trend trading is made up of time and price, and while prices have remained fairly stable since September, time has caught up.
The El Nino effects on the coffee market will likely be less severe than will be initially reported. With El Nino’s, pre-event hype drives prices higher while reality brings prices back to Earth in classic, “buy the rumor, sell the fact,” fashion.
Also, in much of the world coffee is considered a luxury product. Demand will decline if China and Europe continue to slow, as it did by nearly 30% between February and December of 2008.
Commercial traders set a net long record position in late 2013 as coffee neared $1.00 per/lb. and the market promptly rallied more than $1. This time, commercial traders have twice tested the net long record, both in September and November, with little effect on prices. That is a bad sign for bulls. Additionally, the sideways action through the final quarter of 2015 has served only to invite downward pressure on the market as the declining moving averages catch up with the currently depressed prices. This period of sideways action will resolve itself lower as commercial long hedgers unwind their positions from near record levels due to their declining demand and value expectations.
Coffee’s seasonal weakness from March through April sets the stage for fresh selling. We expect this year to be more normal than expected once the final harvests are tallied. Near normal production in a declining demand/strengthening dollar situation should provide the catalyst for this seasonally weak period.