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Writer's pictureIgor Bragato

Impact of Recent USD Trends on the Coffee Market – a Retrospective

 

The US #dollar is one of the many factors (of which fundamentals are primary) that influence the #coffeemarket. Notably in the last two months - marked by a shift in US monetary policy - the dollar has experienced dramatic fluctuations that have seemingly had a strong impact on #coffeeprices

 

In this article, we analyze the recent #USD behavior, the forces behind it, and how it has affected the coffee market. 

 

 

Overview 

Dollar weakness was one major contributor to the coffee bull market from Aug Sep, as the greenback faced its steepest selloff in over 6 months. Subsequently, changes in monetary policy signalizations established a new paradigm (more hawkish), allowing the dollar to recover most of its earlier losses, which helped limit further coffee market gains. 

 

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For context, the dollar tends to share an inverse relationship with #coffee: when the #USdollar is strong, the price of coffee (and any dollar denominated asset) will go down, as less dollars are required to buy the same amount of coffee. When the US dollar is weak, the price of coffee will go up. 

 


 

 

It’s important to recognize that the dollar wasn’t the only factor affecting the coffee market during those times, as significant events in weather (especially) and fundamental factors also played a role. However, these aspects are beyond the scope of this article, which will focus solely on dollar analysis. 

 

Jul-Sep Dollar Collapse 

Starting in early July, the dollar entered a selloff phase (helping support the coffee bull market), which only ended two months later, in late September. Throughout that time, a series of datapoints pointing to a deceleration in the US economy heightened expectations for an interest rate cut, following more than two years of rate hikes. 

 

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The Sep 18th US interest rate decision was widely expected to mark the 1st step of a broader shift from the hawkish US monetary policy, while being the 1st cut in US rates in more than 5 years. Consequently, the dollar began to decline well ahead of the decision.  


 

Note: US interest rate cuts are bearish the dollar, as they imply an increase in “dollar” supply 

 

 

Softer economic datapoints during that period, particularly Inflation (CPI, PCE) and Jobs (Unemployment, Payroll), sustained the bearish dollar trend by reinforcing the belief that the U.S. #economy was "weak enough" to warrant interest rate cuts. 

 

 

That all happened in a sensitive period for coffee, when #Brazil was grappling with lack of rains right ahead of the flowering phase that would form the next crop. The outcome for coffee was dual support from supply concerns due to the drought, combined with currency backing from a notably weak dollar. 

 

The Impressive Dollar Comeback 

The dollar largely shifted to bullish in early Oct, when an ambiguous PCE (inflation reading) emerged, with core and headline datapoints showing opposing views on inflation. This same week saw Jobs data implying labor market strength, and Iran's missile launch in Israel.  

 

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Ultimately, the dollar paradigm had changed, post Sep rate cut. Datapoints were no longer showing economic weakness, and this started halting prospects of a hard landing (50bps cuts). The dollar was not only benefiting from that, but also from safe-haven flows driven by risk-off mood from geopolitical tensions. 

 


 

Coffee saw a dramatic selloff from the 270c highs by early Oct, experiencing an almost immediate reaction to dollar strength, as well as other factors, such forecasts of rains in Brazil mitigating concerns about the main flowering. 

 

Later in mid-Oct, stronger-than-expected #inflation datapoints repeated via monthly increases in US CPI and PCE. This cements the belief that the US might not be ready for a hard landing with 50bps rate cuts, leading to a rally in the dollar that has been pressuring coffee prices ever since. 

 

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