NY futures closed a volatile week slightly higher, as July gained 53 points to close at 78.27 cents/lb.
The market continued to churn a lot of volume within a relatively narrow space, as July has now settled the last 21 sessions in a range of just 212 points, between 76.88 and 79.00 cents. Spec buying into trade selling continued to be the prominent feature and because there has been plenty of liquidity on both sides, the action has been well balanced.
The latest available CFTC report as of April 9 showed that specs had covered another big chunk of their outright short position and also added a modest amount of new longs. In total specs bought 1.33 million bales net from April 3-9 and thereby increased their net long to 2.48 million bales. This means that in the seven weeks between February 19 and April 9, speculators bought a total of 5.28 million bales net and transitioned from a 2.80 million bales net short to a 2.48 million bales net long position.
During this time frame the July contract moved up from 73.48 to 78.27, or about 100 points for every million bales that specs bought. Had it not been for the trade’s seemingly urgent need to increase its short hedge position, the market would probably have gone a lot higher.
The trade sold 1.66 million bales net during the week of April 3-9 and increased its net short to 10.07 million bales. Since February 19 the trade has thereby extended its net short by 5.25 million bales, from 4.82 to 10.07 million bales. Back in January we estimated that the trade would have to increase its net short to around 12-13 million bales, which means that ‘trade resistance’ probably won’t go away anytime soon.
US export sales were about as expected at 254,700 running bales of Upland and Pima for both marketing years. India was the main buyer with 81,300 RB, leading a group of 17 countries. Shipments of 351,500 RB were slightly behind the pace needed to make 15.0 million bales by the end of July. Total commitments for the season have now reached around 14.5 million statistical bales, of which 8.5 million bales have so far been exported. Sales for August onwards are just over 3.0 million statistical bales.
Considering that China is receiving more buying power in the form of a 3.5 million bales sliding scale quota and with India emerging as a sizeable importer, we should see strong support under the market for the remainder of the season. A while back we felt that the market would need carry between July and December, since it looked like there would be a decent amount of unsold cotton left over at the end of the second quarter. However, given the strong export performance in recent weeks (1.7 million bales over the last 4 weeks!), we could for all practical purposes be sold out in three months from now and July might therefore take on a life of its own and stay inverted over December. The May/July spread is already a hint in that direction, because unlike two months ago we are far from full carry at 96 points. Although the certified stock has been increasing over the last ten days and currently measures around 58k, it is still quite a bit lower than the 131k we had going into the March notice period.
So where do we go from here? We feel that the market is fairly priced at the current level and that May is probably not far from its “cash equivalent value” at around 7600. Therefore, if takers were to emerge who simply look at the certified stock as a recap to put against export sales, then there is no need for the market to go much lower, nor do we need to see full carry.
With momentum flatlining, speculators will probably take a less active role and no longer bid the market up, but we expect the trade to be on both sides, with cash market support and fixations kicking in at around 7600, while hedge selling should keep a lid on prices at around 7900.
For the market to break out of this range we need new drivers, such as a US/China trade deal, a change on the economic front or some weather events.
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