Cotton futures market faces rollercoaster ride

25 Sep '10

6 min read

So where do we go from here? The momentum has clearly shifted in the last couple of sessions. Spec longs have not been chasing the market for a while now and trade shorts seem to have weathered margin calls a lot better than we had feared. CFO's must be feeling quite relieved tonight since they are finally getting some money back from New York. At the moment neither speculators nor the trade have a reason to chase prices higher anymore and with the harvest in the Northern Hemisphere gaining momentum we should see the recent fear and panic subside.

With the chart signaling a reversal, spec longs have started to book profits and will increasingly do so if the market doesn't turn back up quickly. If speculators are in 'sell mode', then where is the support going to come from? The two main sources of support are the 10.5 million bales of unfixed on-call sales and Chinese buying. Mills are likely to use a weaker market to reduce their large number of unfixed on-call sales, which should absorb a decent amount of the spec selling.

Then there is China, which is still very much in panic mode after prices on the CNCE and the ZCE futures market have shot up to well over 140 cents on record turnover this week. The Chinese Reserve has been auctioning off another 520'000 tons so far in its latest effort to stem the panic and at some point it will have to come to the world market to refill its strategic stock. We are therefore convinced that there is a sizeable amount of Chinese buying waiting below the market, although what level the Chinese government has in mind is anybody's guess.

Rather than falling apart we believe that the market is going to transition into a sideways range over the coming weeks and months. With the crop now coming in we believe that there will be plenty of selling near the recent highs, but at the same time we expect to see decent support near 90 cents.

Whether the market will eventually be able to take out new highs depends on a lot of factors and it probably won't happen until the 2nd or 3rd quarter next year. The market first needs to establish how much cotton the world is going to produce and see what kind of a toll these high prices are taking on consumption. In the meantime we expect the market to cool off, volatility to drop and spreads to reflect some carry again.

Plexus Cotton Limited

More Textiles News - United States Of America...