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Mumbai (Commodities Control)- Despite a sharp rise in prices, the rally in global cotton prices is far from over. ICE Mar cotton contract posted fourth straight weekly last week.
Fundamentally, ICE cotton’s move higher has been largely based on enormous liquidity, weak dollar index and Chinese demand.
Even technical charts echo the bull trend. From a chart perspective, Cotton Yarn (CZCE) indicates a bullish trend reversal which simply means that there is a strong probability of more upside with a next target of 24,000 in the near term.
Chart no. 1 shows that Cotton Yarn futures (CZCE) have registered a breakout above the key downtrend line near 21,000.
This is further substantiated by chart no. 2 below shows that the spread (spinning margin) of Cotton Yarn (CZCE) vs. Cotton No. 1 (CZCE) has started to expand.
From a chart perspective in over three years, the reference range for Cotton Yarn (CZCE) vs. Cotton No. 1 (CZCE) ratio spread remains well-defined between 1.30x – 1.60x. However the spread has recently turned higher from the lower threshold (current reading near 1.42x). There is meaningful potential for the spread to expand to the upside. Simply put it means that demand for yarn will push its prices northwards along with that of cotton.
With reference to the chart, we see Cotton Yarn (CZCE) outperforming Cotton No. 1 (CZCE). We, therefore, advise on a relative trade basis to Buy Cotton Yarn (CZCE) & Sell Cotton No. 1 (CZCE).
Note : Spread betrween ZCE cotton yarn and ZCE cotton indicates Gross Spinning Margin
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