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Currencies and coffee - an undeniable correlation

From the September 2015 issue.

INTL FCStone provides insight on how the devaluation of global currencies impact coffee prices.

Currency devaluations across the world have been a feature for the coffee market in recent months, and indeed for the broad commodity spectrum.

A weakening local currency against the US dollar means a higher local coffee price, the near-term bearish impact being increased selling and exports and the long-term bearish impact the potential for increased focus on boosting production.

Much depends on what percentage of producers’ inputs are dollar-denominated costs, as fertilisers are more expensive with devaluation in local currency terms if they are dollar-denominated.

Coffee trade is a major source of foreign currency (US dollars) for origin countries, and while the degree to which coffee contributes to this is lower than it was 50 years ago, some nations still depend heavily on the contribution from coffee trade.

The higher the share of production, the larger the impact of currency volatility on the global coffee price, an outstanding example being the selling pressure from Brazil in 2015.

The correlation between the Brazilian real/US dollar and Arabica prices has increased over the past 10 years or so. While there are clearly out-and-out Arabica fundamentals of supply and demand in play, it is fair to say nowadays that a weaker Brazilian real has a stronger correlation with a weaker ICE Arabica price.

Expectations are that the currency situation in Brazil will continue to be a pressure factor for ICE Arabica, particularly when 2015/16 supply is not expected to be as hard hit as had been projected at the start of 2015.

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