So where do we go from here? The lack of volume tells us that there is not much force behind anything right now. However, now that the July liquidation is behind us we should see open interest stabilize at current levels. Technically the market is in a sideways trend, with firm support near the 50 cents level. At the moment we don't see any reason why the market should break below this important support.
Looking in the other direction there is equally no reason to believe that the market should run away to the upside anytime soon. December at 57 cents still seems a bit high compared to where physical cotton is trading, but with the certified stock issue solved, the futures market won't have to answer to the cash market anytime soon and may therefore go its own way. Nevertheless, in order to move higher the market needs to generate some momentum and at the moment quite the opposite is true as traders are leaving the party. We therefore expect no change to the sideways trend in the near term.
In the longer run we still lean towards higher prices, as the cotton balance sheet seems to be tightening next season and we are expecting further US dollar weakness and a flare up in inflation.