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Weekly : NY Cotton Jumps Significantly Higher Ahead of WASDE Next Week; Eyes on Index Fund Rolling, U.S Stimulus

8 Feb 2021 8:15 am
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Mumbai (Commodities Control) – Cotton #2 bounced back for the week ended 5th february as it settled with gains of 210 points for the most active contract. During the week, March futures went as high as 84.88 cents.The Mar-May spread stood at 128 points vs 120 points last week. Now, the May contract is the de facto lead month by virtue of having the largest open interest.

ICE cotton was significantly higher on strength in equity markets, crude oil prices and US export sales, and also on expectations of an increase in world trade and anticipation of tightening in U.S carryout in the upcoming WASDE report. This, despite the index fund-rolling.

Last week, the active cotton contract settled 92 points lower for the week ended 29th January, after four straight weeks of upward rally.

Having said so, ICE cotton futures dipped more than 1% on Friday, as index funds rolled over their positions from the front-month contract, precipitating a pullback from a more than two-year peak. Yet, the overall net change for the market was positive. In fact, for the week, March cotton was up 210 points and for the year 462 points.

The cotton contract Mar 21 Cotton closed at 82.74, down 154 points and May 21 Cotton closed at 84.02, down 147 points. Jul 21 Cotton closed at 84.84, down 137 points and Dec 21 Cotton closed at 80.64, down 43 points.

During the week, the market exploded to the upside on Thursday, as ICE cotton futures jumped to a more than two-year high on Thursday. The investors banked on a bullish federal supply-demand report next week and a fillip to demand from additional U.S. stimulus measures.

On Thursday, Mar 21 Cotton closed at 84.28, up 329 points and May 21 Cotton closed at 85.49, up 316 points.

USDA’s weekly U.S export sales report helped. In its weekly export sales report, the U.S. Department of Agriculture (USDA) showed that net sales of 286,700 running bales (RB) for 2020/2021 were down 11% from the previous week, with increases for China at 85,400 RB. The report also showed that exports of 319,000 RB were up 16% from the previous week, of which 106,500 RB were shipped to China. Sales to the PRC made up 30% of the total for the week, as China maintains a 35% share of the 12.8m RBs in commitments.

Although the weekly sales were not that strong, China emerged a top buyer, which is a positive sign.

Also, the International Cotton Advisory Committee (ICAC) has projected 2020/21 world aggregate production at mere 110.16M bales, with most reductions expected in major cotton spinning nations. ICAC’s latest estimate of world trade has increased to around 42.7M bales.

Experts observed that fundamentals still remain good and steady demand for cotton continues. Also that the upward rally was caused by a confluence of circumstances in a lack of sell-side liquidity.

Meanwhile, the USDA is scheduled to release its monthly World Agricultural Supply and Demand Estimates (WASDE) report on Feb. 9.

Investors were also keeping close watch for developments on the U.S. fiscal stimulus measures.

Infact, all the core fundamentals aside, analysts see the USD 1.9 trillion stimulus package as another reason for speculators to stay invested in commodities. This is in addition to a USD 0.9 trillion bill that was passed in December.

The U.S. Senate early Friday passed a budget plan that would allow for passage of President Joe Biden's $1.9 trillion COVID-19 relief package in coming weeks without Republican support.

On all, it was a terrific week for cotton that had support from Chicago grains, a weak dollar (mid-week onwards) along with all the bullish factors mentioned above. Next week’s trading action will likely be influenced by continued index fund rolling, movements in oil and equity markets, political news and the Feb WASDE report.

International traders observe that the primary uptrend is still alive and kicking with a massive incentive for speculators to roll their positions from July to December.

To our readers, we would like to point out that we reiterated, in our prior reports, the target of 85 cents and the latest week witnessed the March futures at stone’s throw distance from the level.

Now the near term support and resistance for Cotton #2 lies at 79.62 cents and 86.52 cents per lb, respectively.

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