MUMBAI(Commoditiescontrol): The US cotton futures ended the week higher after USDA WASDE report revised US cotton exports upwards to 15 million bales(480lb).
The benchmark July contract settled at 83.35 cents/lb, on Friday and rising 1.4% over the week. Open interest, as of April 12, showed 120,264 lots outstanding, rising 44% from prior week at 120,264 lots.
Total open interest for all contract increased 0.5% over the week to 277,292 lots. The July contract open interest as index funds rolled their position from front month May contract on a lucrative spread switch which traded in the backwardation since April 5. Hence, open interest, between April 5-12, in May dropped 49,288 lots while July rose 36,826 lots and total open interest showed a marginal rise of 0.5% over the week.
Since May’s first notice day is due in the next 6 sessions, there was a lot of mill on-call sales fixation and supporting their fixation mindset was the major sell off, after China imposed 25% import tariff on cotton, leading to prices falling to 79 cents level, a 5 week low on April 5.
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 April 6, reached 14.96 million bales(480lb) down 4.4% from prior week at 15.64 million bales while was down 7% from record high at 16.06 million bales as on March 15.
May contract dropped 31.1% to 1.6 million bales(480 lb) and July declined marginally 0.1% to 4.93 million bales and new crop December decreased 1.6% to 3.39 million bales.
Trade war tension eased in the market quickly and the focus shifted toward the revision of US cotton exports estimate to 15 million bales in the April WASDE report from the previous 14.8 million bales estimated in March WASDE report.
The July contract, which is now the benchmark since it’s the most actively traded contract, closed higher 6 out of the past 7 trade sessions. The single weak settlement was due to a weak export sales report on Thursday, April 12. (Full Report)
The sentiment remains more bullish bias on robust weekly shipment progress which has averaged at 480,341 Running Bales(RB) between March 1-April 5. Even the net sales for current MY 2017/18 averaged at 322,030 RB implying significant strength.
The CFTC report, dated April 10, showed Money managed players increasing their position for the first time in a month by 0.3%, over the week, to 76,276 lots and remained higher 15.3% from previous lows at 66,146 lots. On the other hand, the trade shorts rose 1% to 163,199 lots on major on-call sales fixation in May contract.
The Money Managed players and Trade shorts tug of war is still not over yet. This scenario is reminiscent of last season when prices soared to 88 cents during May mid, a rally of more than 1200 points between now and Mid may last season. Granted, we are already 900 points higher now, but that doesn’t mean that the market couldn’t get squeezed into the high 80s or low 90s.
Over the next several days, merchants will be focused on remaining May futures positions since the May contract’s First Notice Day is April 24. As of Monday, April 23’s close, open long positions (bought futures) risk taking physical delivery.
Next week’s export sales report also will be a focal point as continued good shipments strengthen the market’s conviction that U.S. exports will move even higher. Lastly, for obvious reasons, traders will continue to closely monitor Southwest regional weather forecasts.
Unless specs somehow decide to liquidate a large part of their net long position, we don’t see an easy way out for mills and other trade shorts. Last year specs got spooked by a very bearish new crop outlook, but with West Texas still dry and global production potentially struggling to keep pace with mill demand, the outlook for next season doesn’t currently lend itself to flush out the spec position. Maybe some outside events will do the trick, but if they don’t, then the market will likely move higher.
Open interest in May should be far enough down on Monday that we don’t expect any fireworks over the next week or two.
Technical Ideas(May): Traders long and holding the same can maintain the stop loss at 78.55. Expect higher range of 83.91-85.29 to be tested. Further breakout and close above 85.83 is essential.
Expect resistance at higher range of 83.91-85.30. Weaker opening and correction first to 85.53-81.15 can be used for accumulation with a stop loss of 78.55. Once the breakout above 85.83 is successful then expect a rise to 90 or above.
(By Commoditiescontrol Bureau; +91-22-40015534)