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NY futures end the week with small gains
Aug '08
NY futures ended the week with small gains, as December edged up 36 points to close at 69.84 cents, while March advanced 22 points to close at 74.76 cents.

After the market collapsed by another two cents to 67.08 cents last Friday on decent volume of over 20'000 contracts, things quickly turned quiet again on Monday and Tuesday, with the market treading water in low volume.

This lack of follow-through momentum to the downside set the stage for a 300-point rebound on Wednesday and Thursday. Although this bounce looks promising, we should note that even though volume picked up, it was still not very convincing at 13'000 and 14'500 contracts, respectively.

Moreover, open interest has been declining by about 3'800 contracts over the previous two sessions, which signals that it was probably short covering and not fresh buying that helped that market back on its legs. It will be interesting to see what happens with open interest today, because for any advance to have validity we need to see open interest increase. Cotton certainly had some help from outside markets over the last couple of days.

The US dollar index, which has rallied about 8% over the last four weeks in what most likely was nothing more than a bear market rally, is showing signs of turning back down again and this is underpinning commodity prices. Currencies are an exercise in relativity and we believe that it was weakness in the Euro and the British Pound rather than any renewed strength in the US dollar that lifted the dollar index in recent weeks.

When we look at dollar fundamentals, we see nothing but trouble ahead for the US dollar, because of the massive amount of money that has to be printed out of thin air to pay for all these bailouts the government and the Fed are committing to and because of rapidly deteriorating Federal and State budgets, not to mention the persisting trade deficit that shows no sign of reversing itself.

While cotton prices seem to get some support from technicals and outside forces, we have yet to see any improvement on the physical side. Looking at the latest export sales report, we can't really get too excited about the pace of physical business, since US export sales amounted to just 184'200 running bales, which brings total commitments for the current season to 4.4 mio statistical bales.

While this number looks quite impressive, the problem is that we have so far shipped only 0.5 mio statistical bales. In other words, outstanding commitments amount to roughly 3.9 mio bales at the moment, which is 0.6 mio bales more than a year ago.

With so much cotton yet to be shipped and with the harvest of Northern Hemisphere crops getting underway in about a month from now, mills are currently in no hurry to add more purchases to their outstanding commitments.

So where do we go from here? From a technical point of view, the strong showing over the last two sessions may lead to additional short-covering by speculators in the near term. However, if we don't see a pick up in volume and a rise in open interest associated with it, then this rally will sooner or later fizzle out, because it cannot be sustained on short-covering only.

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