NY Futures display mixed performance this week

04 Feb '12

5 min read

Copious amounts of rain have once again led to widespread flooding in Australia over the last ten days and are raising concerns in regards to quality and yield. After being off to a slow start this season, repeated episodes of cool and rainy weather have set the crop back and although there is still time to recover, the worry is that this rainy La Nina pattern will continue all the way into harvest and result in a disappointing outturn, although a record crop is still foreseen.

So where do we go from here? Over the last six weeks we have seen speculators and index funds sponsor the long side of the market, while the trade has been a strong seller into rallies. Will we see a further increase in new bets over the coming weeks or are we instead going to see either spec long liquidation or trade short covering? We can assume that index funds will remain invested on the long side, while hedge funds are not likely to abandon their new holdings in commodities either, unless they are given a good reason to do so, such as a weakening chart picture, renewed economic concerns or geopolitical issues (Iran).

While profit taking by speculators is certainly a possibility, we feel that it is more likely that the trade will cover some of its shorts.

Most of the trade's short futures form part of basis-long positions and when mills enter the market to buy physical cotton, merchants typically buy back the corresponding short futures. We therefore feel that the market will be well supported on dips as mills seek additional coverage. At the same time it is not likely that the market will run away to the upside either, because there is still plenty of cotton in the system to prevent a squeeze. We therefore continue to see the market in a sideways trend in the foreseeable future.

Plexus Cotton Limited

More Textiles News - United States Of America...