Mumbai, 5 NOV (Commoditiescontrol): ICE cotton futures have put-up a brave fight-back to hit three back-to-back days of limit up, after the natural fibre bled profusely for the better part of 2 months.
On Friday, ICE cotton front-month contract rose more than 5% underpinned by expectations for improved demand from China, as well as a slump in the U.S. dollar and an upbeat stock market provided helping hand.
ICE cotton contract for December closed at 86.93 cents, up 3.93, March 23 finished at 85.67, plus 3.50, and July 23 settled at 83.26, 2.10 higher. Friday's estimated volume was 89,221 contracts.
The front-month contract ended the week more than 21% higher, marking its first weekly rise in eight and its best week since December 2010. During the week, December cotton is up 1,482 points, plus 1,493 points on the month, but still 572 negative on the year.
The cotton market experienced a very bullish week, led by Spot December's incredible 1,600-point vertical move. That contract was inspired higher by massive short-covering ahead of next week's options expiration and then subsequent delivery starting in 12 days.
It must be noted that speculators are often able to push the market around between delivery periods, but the upcoming Dec notice period serves as reality check, where cash and futures prices converge.
The December contract had hit a 22-month low on Monday, but the market has since rallied over 25% having hit the upper trading limit most of the week. At 70 cents December was simply out of line when compared to the cash market and this set the stage for this powerful bear market rally.
First futures moved limit up, then synthetic options moved to double limit up, which prompted the exchange to halt options trading. The last time that happened was in October 2010! Subsequently, ICE Futures on Thursday expanded the daily price limit for cotton futures to 5 cents/lb.
This kind of price action was enough to scare any remaining shorts, triggering panic-like short covering and some opportunistic new momentum buying as well, which locked the market limit up again on Wednesday and Thursday. Fortunately the market didn’t lock up right away, which allowed for large volumes to be traded.
Cotton took cues from a rise in Wall Street's main indexes and as Chicago soybean futures jumped more than 1% while corn was up 0.6%. Further, the slump in dollar after U.S. non-farm payrolls data, made U.S. cotton more lucrative for holders of other currencies.
Elsewhere, there are rumors coming out of China that (President) Xi may be either easing or lifting some of the COVID restrictions. That's good news for Cotton exports. China is the top importer of the U.S. cotton.
On crop harvest front, the USDA will update the progress on Monday. Last time, the pace was 55% complete. Of course, Tuesday is highly important midterm Congressional elections, followed by the November supply-demand estimates on Wednesday, November 9. Some analysts are increasing the 2022 crop by 80,000 bales.
Meanwhile, CFTC's CoT data released after the close showed managed money funds were 7,837 contracts less net long through the week that ended November 1. That came via 6,300 new shorts and reduced their net long to just 5,443 contracts – the weakest since June of 2020. Commercial cotton traders reduced short hedges during the week, and were left 22,418 contracts net short.
In the previous week, speculators were the driving force, adding a large amount of new shorts, while the trade was still a buyer into weakness. Speculators sold 0.95 million bales to increase their net short to 1.32 million bales, which is 12.77 million bales less than what we had in October 2021, when specs were sitting on a 11.45 million net long position. The trade continued to be a steady buyer last week, cutting its net short by 0.94 to just 5.18 million bales, while index funds remained the only net long at 6.45 million bales.
Not only did speculators increase their outright short position to 5.8 million bales as of last week, but they have also done a lot of bear-spreading, which is why open interest rose to its highest level since February. In other words, speculators have dug themselves into a big hole in the December contract and are now trying to scramble out of hit.
US export sales added support, as they came in at a stronger than expected 204,200 running bales of Upland and Pima cotton for both marketing years, with China being the prominent buyer with 122,000 running bales. In total there were 14 markets buying, while shipments of 119,100 RB went to 18 destinations. China’s strong showing was apparently related to a large mill buying for quota reasons.
Total commitments for the current season are now at 8.85 million statistical bales, whereof 2.75 million have so far been exported. Last year we had 9.0 million statistical bales in sales and 2.2 million bales shipped.
USDA’s weekly Cotton Market Review showed 3,057 bales were sold through the week for an average price of 76.61 cents/lb. The Cotlook A Index was 92.20 cents/lb after a 3 cent increase on November 2. USDA updated the AWP for cotton to 65.46 cents, down by 349 points.
Speculators covering their short position has provided a technical support to natural fibre. This momentum was strong enough to break above a two-month downtrend line and helped close last three consecutive sessions limit up.
Analysts expects markets to transition into a sideways range, as selling pressure from speculators is gone, since they won’t short the market again anytime soon after this debacle. There isn’t much natural selling at this point, but this will change once supplies increase. Rather than expecting much selling pressure, we will likely see the market ease off due to a vacuum of buying once the short-covering is over.
For Monday, support for December Cotton contract is at 82.83 cents and 78.74 cents, with resistance at 89.45 cents and 91.97 cents.
(By Commoditiescontrol Bureau: +91-22-40015505)