NY futures bounce back this week

08 Apr '11

5 min read

We have long held the belief that bailing out anyone in need, from financial institutions to entire nations, will ultimately lead to a severe debasement of the world's leading currencies. While this may not be expressed as much in the cross rates between these two currencies, it will manifest itself in the form of higher nominal prices of just about anything from gold to cotton.

Unfortunately the governments of both the US and the European Union are either unwilling or unable to do much about their escalating debt problem. Take the ongoing US budget debate for example! Republicans and Democrats are engaged in a fierce political battle at the moment, debating whether they should cut the budget by 33 or 40 billion dollars and in what areas. However, in the end they are talking about peanuts when compared to a budget shortfall of around 1700 billion this year.

In other words, it doesn't really matter whether the national debt in the US will grow to 15'493 or 15'500 billion dollars by the end of this year. We see this as nothing more than political posturing ahead of next year's presidential election. Meanwhile debt levels in the US, as well as in Europe, are rising at alarmingly fast rates and the only remedy left at this point seems to be the printing press. This is highly inflationary over time and we are already experiencing the first symptoms of it in the form of rising commodity prices.

So where do we go from here? While physical prices for nearby shipment are under some pressure, NY futures follow different dynamics and additional short covering has the potential to lift the May contract even higher. Unfixed on-call sales of 1.3 million bales on May and 3.2 million on July are still rather high and should keep the market well supported.

However, there is no denying that May futures are currently overvalued in comparison to cash prices, probably by at least 15 cents. In other words, other than squeezing the shorts, there is little incentive for anyone to take the May contract at current prices, especially at such a steep invert to July. We therefore expect a very volatile next two weeks until the fate of the May contract gets decided. Although December got hammered due to the unwinding of spreads, we still like it at the current level for reasons mentioned in our last report.

Plexus Cotton Limited

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