NY futures close the week nearly unchanged

06 Feb '10

6 min read

Rising fear in reaction to sovereign debt problems in Europe and other parts of the world, combined with China's hawkish stance on asset bubbles seem to have set in motion a reversal of the US dollar "carry trade", which prompted many fund managers to exit positions in emerging markets and commodities. In a carry trade investors borrow money at very cheap interest rates and then sell the respective currency in order to invest into higher yielding assets elsewhere. For years the yen has served as the base currency for such carry trades, but since last spring traders have been doing the same with the US dollar in a fairly big way. This tends to create asset bubbles in various countries until certain events scare this flock of investors into running the other direction.

In 1998 it was Russia's debt default and the demise of Long-Term Capital Management that created panic in global markets and forced a temporary unwinding of the yen carry trade, with the yen surging nearly 20% in just two months. This time around it is Dubai, Greece, Spain and some other culprits along with a tougher stance by the Chinese government that have caused investors to hit the rewind button. As a vast amount of money is being repatriated the US dollar rises, which in turn reinforces a negative feedback loop in stocks and commodities.

These events have caught a lot of money managers by surprise, because fundamentals have been indicating a pick-up in economic activity and the forecast for global GDP growth has been raised just a few weeks ago. Not being able to make sense of the market's recent behavior, confused traders have decided to cash in some of their positions, among them commodities, and are moving to the sidelines until the smoke clears. However, as was the case on previous occasions, we don't believe that this money will stay on the sidelines for very long. Also, should the current uncertainty lead to a more pronounced drop in the stock market and threaten the recovery process, we are convinced that governments and central bankers will once again come to the rescue with additional stimulus programs and quantitative easing. This in turn will heighten concerns about inflation, against which tangible assets like commodities still offer the best protection.

So where do we go from here? It is difficult to know how much longer these outside forces will influence the action in the cotton market. However, unless there is a sudden sharp drop in demand, which we do not foresee, we will be dealing with one of the tightest supply situations since 1995 as we head into spring and summer. From a technical perspective the market has so far managed to stay near the weekly uptrend line and it has also been able to bounce off of the recent 68.20 low on three occasions. While anything is possible in the short term, we remain quite friendly for the second and third quarter! Tomorrow's NCC plantings intentions will give the market something to talk about, but no matter what this number turns out to be, it will not help to alleviate the extremely tight situation in the current marketing year. We continue to believe that the July/Dec spread offers one of the best risk/reward plays in the current environment!

Plexus Cotton Limited

More Textiles News - United States Of America...