However, after a big turnover on Monday with over 39’000 contracts changing hands, there was not much follow-through selling beyond that, as trading turned relatively quiet over the following three sessions.
We are somewhat surprised by how well open interest has been holding up during this selloff, as just 6’368 contracts were liquidated during this week’s 400-point drop. That’s remarkable since open interest climbed by nearly 43’000 contracts over the previous 19 sessions, during which the market gained 400 points.
This leads us to believe that a large part of these new longs and shorts that were established between September 10 and October 4 belong to the trade, rather than speculators, because the latter would have been much more aggressive in getting out of harms way this week.
Some of these new futures long positions could serve as ‘substitute purchases’ against short sales of both US and non-US growths, since the lateness of Northern Hemisphere crops as well as the uncertainty in regards to quality have made it difficult for merchants to cover their commitments in the cash market.
In other words, this relatively high open interest of over 205’000 contracts is probably due to sizeable trade positions on both sides, as some traders operate with basis-longs, while others are holding basis-shorts, both unable to do much until the crops are finally in.
Harvest can’t arrive fast enough for traders, because the market has been incredibly dull in recent weeks, with volatility falling to levels not seen in years. However, we do believe that trading will turn a lot more lively in November, as there is still plenty of cotton to be marketed all over the globe.
With government organizations like the USDA and CFTC still shut down, the market is currently deprived of important reports, such as WASDE, weekly crop progress, US export sales and ‘Commitment of Traders’, making it difficult to take the pulse of the market.
Fortunately there seems to be a compromise in the making and we are hopeful that all agencies will be operational again next week. In lieu of a USDA estimate, the market seemed to pay close attention to the Informa crop number of 13.7 million bales last Friday, which was quite a bit more optimistic than USDA September estimate of 12.9 million bales.
Since the weather has been surprisingly cooperative over the past couple of weeks and early yield reports seem to hold some promise, the US crop may indeed be above 13.5 million bales, provided the weather continues to play along.
After falling to less than 12’000 bales last week, the Certified Stock is once again on the rise, as it amounted to nearly 56’000 bales (including 38’500 under review) this morning. Rumor has it that this inventory will grow to at least 150’000 to 200’000 bales over the coming weeks, as Glencore is apparently re-tendering some of the cotton they took up in July.
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