Coffee price rallies on the back of a weaker dollar and supply shortage

By: Faith Maina
Faith Maina
Faith strives to break down complex developments so investors can make better informed decisions. When Faith is not immersed… read more.
on Nov 18, 2020
  • Coffee prices rose by ~7.87% in November after falling sharply in October.
  • The U.S. dollar has lost by 4.87% against the Brazilian Real this month.
  • There are fears of reduced coffee supply due to La Nina in Brazil and Colombia.

Coffee price has risen by ~7.87% in November. The upward trend is largely because of the weak dollar versus the Brazilian Real. Besides, there has been fear over a looming shortage in coffee supply due to the La Nina phenomenon.

Coffee price
Silver prices rise amidst a strong Real and La Nina

Weaker dollar in relation to the Brazilian real

Brazil is the largest producer of coffee in the world. It produces about 40% of the produce consumed across the globe. Based on recent data, Brazil’s harvest is around 61.63 million bags. It is the second-largest production in the country since 2010.  

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Coffee is priced in the U.S dollar. As such, its price thrives in weakening dollar environment. The U.S. dollar has lost by 4.87% against the Brazilian Real this month. While this Latin American currency dipped earlier this week as the retail sales failed to meet expectations, analysts are confident in the country’s economic fundamentals. Overall, emerging markets currencies have been strong. If you are looking to invest in coffee, you will need a trustworthy commodity broker. Here are some of the best online commodity brokers that you can consider.

Matthew Ryan, Ebury’s senior market analyst said, “Given that the real is very cheap at current levels, we do not think that a continued sell-off in the real at the rate witnessed since the onset of the crisis is likely in the long-term.” The analyst cited the country’s low external debt and solid foreign exchange reserves to substantiate his assertion.

Another reason why the real is on an upward trend is the victory of president-elect Joe Biden. Analysts and investors alike are hopeful that the new U.S. administration will embrace the route of negotiations rather than trade wars. Brazil and other economies in Latin America and beyond are bound to benefit from such strategies.

La Nina heightens fears of low coffee supply

Despite the booming harvest in the current season, there have been fears over a looming shortage in coffee supply. To start with, the biennial effect is a common phenomenon in coffee-producing regions. The term refers to a trend where high yields in one year are followed by reduced volumes in the next. Based on this phenomenon, the next season is likely to have lower yields; an aspect that will have a significant impact on coffee prices.

At the same time, Brazil is experiencing unfavourable climatic conditions due to La Nina. The recorded high temperatures and low rainfall have heightened fears over reduced coffee production in the 2021 season.  According to the Gro Drought Index, 20% of the districts in Brazil are experiencing severe drought while 22% have recorded exceptional drought levels. La Nina has also been observed in Colombia. The country is ranked 3rd in the world in terms of coffee production.

Coffee price technical outlook

Coffee price
Coffee Futures technical chart

On the four-hour chart, we see that coffee futures started rising on November 2, after reaching the July low of $101.75. Since then, the price has moved above the 61.8% Fibonacci retracement level at $110 and is now approaching the 50% retracement level.

 It has also bounced back from the second support of the Andrews pitchfork tool and moved above the 28-day and 14-day exponential moving averages. Notably, the price has also broken out above the descending green channel.

Therefore, it seems like bulls are gaining momentum, which will likely see it continue rising. The next level to watch is the 50% retracement at $114.85. For this trade, the stop will be $106.10, which is the upper side of the descending channel.

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