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Cotton trades higher
Jul '08
Tuesday is marked with a day full of events and extremely volatile markets. Despite the plan to aid the two mortgage giants backed up by the government, investor confidence in the U.S. financial system weakened further, which was reflected in the drop of the overseas stock markets.

Retail sales, however, rose a disappointing 0.1% last month, worse than the expected 0.4%. Fed chairman testified before congress which assessed that the economy is facing “numerous difficulties”, and Dow Jones index tumbled once again below 11,000 in the early morning but recouped part of the loss while crude dropped more than $10 a barrel.

NY cotton had an impressive session despite the general sell off in commodities. Crude oil trading made it to the headline again with a nearly $11 move during an extremely volatile session. Grains also saw losses confirmed by decent trading volume when the commodity index took a hit of more than 800 points. Cotton, on the other hand, steadily traded higher after an intra day low at 71.58 basis Z'08.

Supported by December contract 70 puts selling and 72/80 call spreads buying, the strength came mostly from screen buying in the afternoon session. Z'08 eventually settled at 73.71, up 168 points, close to today's high. This morning's spec hedge report shows that specs have added to their short positions and are currently 3% net long, down from 6.2% the previous week (charts on page 2 in attached PDF).

At the moment, cotton seems to be forming a long term trading range between 70/80 cents. We find good demand scale down when the front month breaks 70 cents, but there is good trade scale up selling above 80 cents where certing cotton becomes more attractive. Cotton has lost nearly 10 cents since end of June and we have been trading sideways looking for a short term bottom.

The performance of cotton today seems to be out of sync with the broad based commodities. And the near term trading low of around 71 cents could encourage some buying interest from the funds at current levels.

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