'US Dollar' wild card in present times for cotton markets

31 Oct '08

5 min read

In the end it all depends on how bad this economic downturn will get and to what level cotton consumption at the end-user level will sink. Will it be 110 mio bales, 105 mio bales or could it be even lower than that? No one has an accurate answer to that; it is all guesswork at this point. But early indications point to a rather protracted and steep contraction and therefore buyers are not willing to commit to anything but the absolute necessary right now. Therefore, the price outlook remains grim and the futures market will likely follow in the tracks of the AWP.

However, there is a wild card in this commodity pricing game - the US dollar. The greenback has recently gained over 20 percent as measured by the Dollar Index, driven by a flight out of emerging market assets, the unwinding of the carry trade, short dollar bets gone wrong and a flight to 'safety'. This has led to massive selling of world currencies and buying of the dollar. But as we have pointed out before, these events are finite and there will be a point at which another set of fundamentals takes over, which will not be so kind to the US dollar.

We talk about the massive money printing that is going on, which has expanded the Fed's balance sheet by 900 billion dollars over the last seven weeks alone, more than doubling it in the process. The strength in the dollar has exacerbated the crash in commodity prices and once it starts to weaken again, it will invariably raise the floor of commodity prices to some degree.

Summing up, we see continued price pressure ahead, although the rate of decline should begin to slow down. Outside a reversal in the US dollar we don't see much chance for a sustainable rally at this juncture. The most likely course of action is a trading range with a slight downward bias, which should help to bring the high volatility readings down over the coming weeks and months.

Plexus Cotton Limited

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