Dec & March drop pull down NY cotton futures this week

08 Nov '14

5 min read

US export sales were nothing to get excited about, as just 71,500 running bales were exported to 14 different markets, as higher prices kept many buyers away last week.

Total commitments for the season now amount to 6.15 million statistical bales, of which just 1.2 million bales have so far been exported, which is the slowest pace in 14 years.

The CFTC spec/hedge report confirmed that speculators were the sponsors behind last week’s rally, since they bought 1.05 million bales net, while the trade was selling 0.99 million bales net.

Interestingly new spec buying of 0.60 million bales contributed a greater amount to the buying than spec short covering of 0.45 million bales.

Speculators are by no means a united front in the cotton market, since we currently have 6.4 million bales in outright longs opposing 7.0 million bales in outright shorts.

These are fairly sizeable positions that could act as momentum boosters via short covering or long liquidation, if the market were to break out of its current sideways pattern.

The report is of the opinion that, cotton is currently in a bear market with its hand brakes on, as various government support programs have proven effective in slowing down supply pressure.

Nevertheless, there will be enough cotton in the ROW system this season to slowly but surely weigh prices down, although it may just not happen as fast as many traders were expecting.

With December going off the board, the market is finally going to transition from inversion to carry, which is more congruent with a bearish market environment and expect carrying charges between March, May and July to build over the coming months.

This week’s option expiration and the beginning of the GSCI roll should make for a more lively market over the coming sessions. However, the report warns not to expect any fireworks in the final weeks of the December contract, since there is enough cotton in the system to prevent a squeeze.

It says, open interest should drop sharply once Dec goes off the board, since a large amount of it is tied to the Dec/March spread, so traders should not be surprised to see total open interest drop by 40-50k over the coming weeks, which will not be perceived as a bullish development.

Given the still sizeable outright spec short position, one cannot rule out any further spikes towards the mid 60s on short covering, but trade selling should be there to absorb the buying.

Once December is off the board and harvest is completed, the report expects the A-index to drift towards 65-66 cents, which would open the door for NY futures to move to 58-59 cents. (AR)

Fibre2fashion News Desk - India

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