Details of the ballyhooed trade deal are scant, with no timelines or specific amounts of purchases. A hefty $40B to $50B is being tossed around the press, as cotton gets lumped in with soy and pork as much needed raw products. The entire US cotton crop is worth maybe $7.5B, so China could swoop up the whole banana and then go for the others. Don’t laugh, we all remember 2011.
The $ has broken out to a 2 month low, and we think this is a long term trend change. Interest rate differentials show the US has much room to lower rates, and that is $ negative. Short and intermediate term correlation between cotton and the $ is not good, but longer term one can see a rough inverse relationship. Best to trade each separately on their own merits.
The big unknown whether cotton pauses at 65c and reverses, or runs above it, is China. The balance sheet argues against any sustained, large purchases for reserves. But the balance sheet takes a back seat to government decisions. Whoever says they know for sure – doesn’t trade markets.
Our bias is that the current rally is built much more on some losses in W TX last weekend due too a freeze, and expected heavy rains in GA and Fla panhandle tomorrow into Sat. Certs are small enough for a poorly financed merchant on Cotton Row to squeeze the Dec, and this harvest is running about 3 weeks behind. All of the above are the raison d etre to get a 9c rally, and in a few weeks, none will matter. The US is sitting on a pile of cotton, as is China, as is the world. The one real bullish, and possibly lasting influence, is the new decline in the $.
Divergence between this week’s high and momentum is occurring on day charts, as momentum is not following price to a new short term high. The Dec continuous chart shows Dec probed into an area containing 3 major lows, those being 6541, 6615, and 6525. If Dec closes close to where it opened Sun night (6420), it will make a nice star top on weekly charts.
As always, please use protective buy and sell stops when trading futures and options.
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