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Cotton traders to keep eye on AWP/futures relationship

21 Aug '09
5 min read

Trade selling against loan redemptions leads to strong resistance in the futures market, while unfixed on-call sales provide layers of support (there are currently 4.4 million bales of unfixed on-call sales on the books). However, it is not just US cotton that is traded that way, as merchants are increasingly using futures in their foreign operations as well.

As long as the global balance sheet is expected to remain fairly balanced, we see it difficult for the market to break out of this sideways pattern with its strong boundaries of support and resistance. It would take a big departure from current projections on either the supply or demand side to change this status quo. With peak harvest in the Northern Hemisphere approaching, time is running out for something drastic to happen on the supply side, although adverse weather is still a potential threat, particularly in regards to quality.

How about demand? This week a prominent market research group gave an interesting assessment on US consumer demand. It was mentioned that US apparel sales have dropped by around 8 percent annually, but denim sales have bucked this trend and are running over 6 percent ahead of last year. In other words, the heavy weight items are selling quite well, which means that cotton consumption at the end-user level may be stronger than expected. Combined with the still robust retail sales growth we are seeing in Asia it could well be that global demand numbers are underestimated. The fact that stocks don't appear to be burdensome anywhere seems to support that notion.

So where do we go from here? We still see December in a 55 to 65 cents range, from which it may be difficult to escape anytime soon. Whether the 58 cents level will hold remains to be seen. If it breaks, we will probably get a quick move towards 55 cents, where we expect to see very solid support from the trade.

Plexus Cotton Limited

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