Coffee Pares Gains after Strong Rally, Bulls May Come Back Soon

Coffee prices declined in early trading hours on Wednesday, after marching higher for five trading days in a row, as erratic rainfall in Brazil is bringing potentially supply threats to the upcoming crop. Even though coffee prices have rallied for eight out of the last ten sessions, investors betting on coffee are able to bid the commodity up even higher as the already supply shortfall situation is expected to get worse.

Brazil, the world’s second largest robusta coffee producer may have to witness another poor crop as the latest erratic rainfall could hurt they key flowering period which will directly decide yields of coffee beans. While the upcoming crop is being threatened, the last two years of drought in Brazil has damped the top grower’s production significantly.

Bad weather has also impacted the robusta crops in Vietnam – the largest robusta producer. According to market sources, the country’s worst drought in three decades caused its crop to decrease by 11% this year. Drought conditions in Vietnam have led farmer in Central Highlands to switch to grow other crops which are more economic in the use of water.

The International Coffee Organization forecast the coffee market will experience the third consecutive year in which supply has lagged behind demand. ICO on Friday anticipated poorer crops for Colombia, Indonesia, Brazil and Vietnam in the 2016/17 crop year due to unfavorable weather conditions, after estimating a supply deficit of 3.3 million bags for the 2015/16 crop year that has just ended.

Traders will likely pay close attention to the rains in Brazil. If satisfactory rainfall comes in the following weeks, the commodity will be poised for a correction, but continued concerns over dryness would definitely support upside.

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Fig: Coffee H4 Technical Chart

Coffee retreated from four-week highs at around 159.40 after a rally that sent the commodity more than 10% higher. The coffee market entered the overbought zone and consequently pulled back as bulls has been exhausted after sustaining the price higher for a long period of time. However, after some corrective moves, coffee prices are expected to resume its uptrend with supports from two MAs placed under the price action.

Trade suggestion

Buy limit at 157.00, Take profit at 159.00, Stop loss at 155.00

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