Multiple negative pressures may push ICE below 80 cents

Since March, ICE cotton futures have continued to fluctuate and fall. The main market price in May fell below 85 cents/pound and then consolidated in the 80-85 US pound box. The tr…

Since March, ICE cotton futures have continued to fluctuate and fall. The main market price in May fell below 85 cents/pound and then consolidated in the 80-85 US pound box. The trend of “a top has a top and a bottom has a bottom” is obvious, and funds have pulled up. The pace of rebound has been slowed down.

According to CFTC statistics, as of March 3, ICE futures 2022/23 ON-CAll contracts have been reduced to 48,057 contracts. The confidence of speculators and cotton trading companies continues to decline under the influence of multiple factors such as the continued decrease in the number of ON-CALL point price contracts, the low long-term ratio of funds, the negative release of USDA’s latest monthly report, and the deterioration of U.S. cotton export performance.

A medium-sized cotton company in Qingdao said that since mid-March, both international cotton merchants and cotton importing companies have been significantly less reluctant to sell than in January/February. The resources for cargo, bonded and customs-cleared cotton have increased significantly, and some companies have lowered their basis spreads. “Two-pronged approach” with expanding bargaining space, trying to speed up shipments.

The author believes that the main force of ICE may break through 80 cents/pound again. There are several reasons for this:

First, the Fed suddenly enlarged its stance on raising interest rates by 50 basis points in March, putting pressure on the commodity futures market. Recently, Federal Reserve Chairman Powell said that the Fed may need to raise interest rates more than expected in response to recent strong data. If the “overall” information indicates that more stringent measures are needed to control inflation, the Fed is prepared to take greater measures. Interest rate hikes. Investors have increased the probability that the Federal Reserve will approve a 50 basis point interest rate hike at the upcoming March 21-22 meeting to 70%, which is significantly higher than the previous expectation of 0.25 percentage points.

Second, the global cotton supply in 2023 is still worth looking forward to. Recent rainfall in major cotton-producing areas in the United States has improved, and soil moisture has improved (except for West Texas, which is still relatively dry). The decline in U.S. cotton planting area may narrow in 2023, and the abandonment rate is significantly lower than that of the previous year. has become a reality, and the fund’s confidence in speculation is obviously insufficient. In addition, with the end of cotton planting in Brazil and Australia in 2022, expectations for a year-on-year increase in area and output have increased, which is negative for ICE.

Third, global cotton consumption in 2022/23 will recover or be significantly lower than predicted by all parties. Since February 2022, not only the contracted export performance of US cotton, Brazilian cotton, and Australian cotton has been poor, but the export data of Indian cotton, African cotton, etc. are also very weak. The industry is overly optimistic about the recovery of cotton demand in China, Southeast Asia/South Asia, South America and other countries.

Fourth, the Federal Reserve continues to raise interest rates, which puts severe pressure on currencies such as the RMB to depreciate against the US dollar, which is not conducive to foreign cotton imports. For example, after Federal Reserve Chairman Powell issued a hawkish signal, the offshore RMB once fell to 6.9951 on March 9, just one step away from breaking through the “7” mark; since February 2023, the offshore RMB has depreciated by a total of 2,244 points. base point. Such a large and rapid depreciation has resulted in a significant increase in the cost of cotton imports.

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Author: clsrich