Zigzag movement in cotton market

23 May '09

5 min read

With emerging markets back in favor, we are seeing money flowing out of the dollar and back into the currencies of these emerging markets. This trend is likely to get more pronounced over time as an increasing number of investors subscribe to the de-coupling theory, according to which countries like China, India, Brazil and Russia will be able to grow their economies even if the US and Europe remain in recession.

The US can ill-afford to have foreign savers put their money anywhere else but into the growing mountain of treasury debt, but this is what seems to be happening. Typically interest rates would rise to lure investors back, but the US cannot allow rates go up because the economy is too weak to bear it.

The alternative is more money printing by the Fed to mop up the extra supply in Treasury debt and that will be bearish for the US dollar. We therefore see continued weakness ahead for the greenback and this in turn will support commodity prices, since nearly all of them are still traded in US dollars.

So where do we go from here? The market seems to be 'sandwiched' at the moment, with the release of government stocks in China and potentially some other countries keeping a lid on prices, while relatively tight supplies in traditional channels and a weaker dollar are supporting the market. Based on that, we feel that the market is transitioning from a bullish into a sideways trend of somewhere between 52 and 60 cents in the spot month.

Plexus Cotton Limited

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