Cotton prices remain enslaved by the constantly changing political landscape between the United States and the People’s Republic. The markets remain uncertain keeping many speculators on the sidelines in risk off mode. The arrest last week of Chinese telecom CFO Meng Wanzhou is the latest cold water thrown on warming Chinese and US trade dispute. Cotton is no stranger to Chinese tariffs. Traders have always dealt with import tariffs for all origins of cotton, only now there is are added tariffs for US bales. As we all know, the Cotton #2 contract is a US contract and remains hyper focused on the US balance sheet, especially when stocks-to-use are historically on the lower side. The uncertainty in the US balance sheet cannot be overstated when Chinese policy is in play. In this case, the worlds largest exporter may find little demand from the largest importer, or quite possibly huge demand.
Tomorrow’s WASDE report will give no clues on Chinese trade policy, but will likely show only minor changes across both suppliers and consumers. I could see the US supply moving lower, with the obligatory reduction in exports to leave the ending stocks close to unchanged. Chinese consumption is also likely to move lower on a general slowdown of spinning. Another small reduction in Turkish consumption would not be surprising as they continue to struggle to import lint with a much weaker lira. Yarn stocks in and outside of China are widely thought to be on the side currently. On the global production side, many are talking about more cotton in Brazil and less in India from last months estimates.
The technical pattern of relevance continues to be the sideways range trade. Prices have been between 76.50 and 82.00 for roughly three months now. Interesting that the benchmark 200-day moving average is also serving as resistance just above the market, currently at 81.74. Many long-term trend following systems will use such a long-term average to guide their positions.
by Andy Ryan