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Coffee futures - does the rally have legs?

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Arabica coffee futures continue their strong rally - with the front May contract adding 2.7% on Thursday, taking total gains for the month to 15.5%.

Production concerns in key exporting countries have continued to develop.

Prices, now at their highest levels since October, have been supported by news of dryness in both Colombia and Brazil, the top two producers of the bean.

'Dryness in Vietnam too'

In Espirito Santo, Brazil's key robusta coffee-producing state, the crop has suffered from an extended drought that has severely impacted projected yields for the 2016-17 harvest.

Rabobank senior commodity analyst Carlos Mera flagged a 24%, or 3.9m-bag, drop year on year in Brazilian robusta output after conducting a crop tour through key states earlier this year.

Compounding this issue, Mr Mera notes that "we are starting to see dryness in key Vietnamese robusta areas" which will keep robusta prices supported in the short-term. (Vietnam is the top robusta-producing country)

On Thursday, London robusta coffee futures rallied, too, closing up 2.3% at $1,459 a tonne for May delivery.

Technical help

Trading technicians will also be buoyed by the New York arabica May contract breaking out of its recent trading range.

Having spent the last six months in a well-defined downtrend, the May contract last Friday broke out through the top-side of this recent range, surging 3% during the day's trade.

The contract on Wednesday set another milestone when it closed above its 200-day moving average for the first time in 15 months.

And a supportive broader macro picture has also fuelled coffee's price revival.

With risk assets, from equities, oil and other soft commodities, all largely gaining ground on the back of US Federal Reserve chairman Janet Yellen's more dovish assessment of the US economy and conservative outlook for interest rate rises.

The weaker dollar has increased the competitiveness of dollar-denominated commodities in export channels.

Where to from here?

Ms Yellen's announcement overnight has certainly provided some bullish sentiment across commodity markets.

And, whilst fundamental news continue to flag production cuts, more gains for Arabica futures in the short-term cannot be ruled out.

By Nicholas Burke, coffee editor

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