MUMBAI(Commoditiescontrol): The US cotton futures witnessed a volatile trend ending the week on a firm side amid trade war concerns between US & China and ahead of USDA WASDE report on April 10.
The benchmark May contract settled at 82.54 cents/lb, on Friday and rising 1.3% over the week. Open interest, as of April 5, showed 92,038 lots outstanding, dropping 18% from prior week at 111,193 lots.
Total open interest for all contract dropped 1.8% over the week to 275,868 lots indicating both side, speculators long and trade shorts, exiting the market.
Trade war between US & China worsened after the Chinese government retaliated with a 25% import tariff on 106 US products which also included cotton, soybeans, etc. Immediate reaction of major sell off was observed on April 4 where prices breached the key support level of 80 cents and registered a low of 78.62 cents, a 5 week low.
This gave trade shorts, attributed to on-call sales mill fixation, to cover their position and prices rebounded to close slightly higher 79.64 cents on April 4. Further, robust export sales/shipments report helped the market wipe off all of the losses incurred on April 4 and ended the week 1.3% higher at 82.54 cents/lb.
The market was expecting open interest to drop sharply on April 4 but surprisingly the reduction was less significant, as it dropped a mere 3.25%, day on day, to 97,429 lots on the benchmark May contract. In fact, open interest dropped sharply on 5.5%, day on day, to 92,038 lot on April 5 which was due to large short covering amid on-call sales fixation.
Since we heard of sizeable mill fixations when the market dropped yesterday, the only explanation for this lower than expected decline in open interest is that speculators must have added new shorts when the market broke through technical support.
This set the stage for an impressive rebound on April 5, as wrong-footed specs were forced to cover, chasing the market higher, along with mills who missed their chance to fix on April 4.
USDA weekly net export sales were 378,349 Running Bales (RB) for the week ended on March 29, up 22% from previous week's 309,441 RB and is higher than prior 4-week average at 343,386 RB. (Full Report)
Total commitment for the 2017/18 MY reached 15.82 million 480lb bales(106.9%) of USDA’s forecast at 14.8 million 480lb bales(100%) which was raised in the March WASDE report.
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The on-call sales position(Where mills purchase bales on-call but do not fix prices and in turn sellers/merchants, hedge themselves creating a short position on the futures market), as of March 29, reached 15.64 million bales(480lb) down 1.7% from prior week at 15.92 million bales while was down 2.6% from record high at 16.06 million bales as on March 15.
The current season May contract continued to see mills fixing their outstanding position as on-call sales dropped 13.1% to 2.32 million bales(480 lb) but July increased a tad 0.1% to 4.94 million bales and new crop December increased 0.1% to 3.4 million bales.
The CFTC report, dated April 3, showed Money managed players decreasing their position by 6%, over the week, to 76,066 lots but remained higher 15% from previous lows at 66,146 lots. On the other hand, the trade shorts declined 2% to 161,505 lots on major on-call sales fixation in May contract.
The long-positioned hedge funds/speculators are spooked at present amid trade war between US & China but have not completely given up. The uncertainty over the date of tariff implementation will keep the hedge funds/speculators cautious and volatility could be evident.
The demand side of the game seems to have more power to keep the bulls alive in cotton prices as large on-call position at 46% to be fixed in the remaining 12 weeks or so. Further, the robust export sales/shipments progress and drought conditions in key cotton growing regions of Texas will support the bulls going forward.
The USDA WASDE is due on April 10 at 21:30 IST and the report could be inclined to a bullish side amid possibilities of upward revision to export estimates.
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Technical Ideas(May): The low registered last week was 78.62. Cotton prices tested the DRV which was at 78.47 last week.
Recovery has been witnessed to close the week at 82.54. Last week we had indicated that correction to DRV-78.47 or below can be used for accumulation with a stop loss of 76.50. The low was almost at the DRV.
Traders who were able to implement had the opportunity to benefit. On the weekly chart as a result of the recovery, we have a large lower shadow which suggests support at lower level but minor correction on volatility may happen to test the lower support level.
Lower range for the week can be 81.54-79.62. Higher range for the week can be 84.46-89.30.
The peak registered a few weeks back was 86.60 therefore breakout above 86.60 is essential at the end of the week to show a rally. Accumulate at 81.54-79.62 with a stop loss of 76.44.
A consolidation process could be happening at lower level as long as the low of 76.44 is not violated.
(By Commoditiescontrol Bureau; +91-22-40015534)
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