After reaching its 50% retracement from the January high to the April low, the cotton market is pondering its next move. The recent rally was caused in part by emerging dry weather in Texas, which was fueled by short-covering from speculators.
When one realizes managed money traders have essentially been net-short ever since the 2018 tariffs, it would seem a pause is warranted. Right now, their action may be to simply get flat. To that point, speculators stand at 6,800 contracts short after roughly five weeks of short-covering.
Thursday, USDA will report on weekly sales and exports. Given all the political fallout between the U.S. and China, the possibility of Chinese cancellations going forward is a real concern. Yet, China’s economy seems to be somewhat improving.
Overnight, its Caixin purchasing managers services index (PMI) came in at 55.0 in May from 44.4 in April, reaching the highest level in 10 years. A reading above 50.0 suggests growth in the sector.
Improvement is not just China’s alone. In the Eurozone, the PMI rose to 30.5 in May from 12.0 in April, while India’s was 12.6 from 5.4 and Japan’s was 26.5 from 21.5 in the same period. The U.S. PMI is out later Wednesday and expectations call for reading of 44.0 in May from 41.8 in April.
Brazil has become the center of the coronavirus in Latin America, which potentially can effect exports. Additionally, the Brazilian real (currency), has risen some 2.8%, which could make U.S. exports more attractive.
For Wednesday, support for July cotton is 58.80 cents and 57.80 cents, with resistance at 62.00 cents and 62.50 cents. Current estimated volume is 5,200 contracts.