USA:Cotton rides wave of buying

Wednesday session reminded us all how volatile this market can be. A positive open took the futures market to 120 points higher even before the options pit open. As early morning options activities were mixed, cotton was riding the wave of buying in crude oil and grains. NYF managed to regain part of the loss to around unchanged level, before it sank 200 points one hour later.
So what has taken cotton to the current price level under the bearish fundamentals? A combination of factors: a weak dollar, the lower interest rate, the stagflation economic situation, an overall strong commodities markets in energy, metals and grains, and the need for cotton to compete for acreage with other agricultural commodities.
As fundamentals will eventually play a role in the market direction, in the short term, we’ll definitely have to look at outside markets for clues.
The sharp drop in the dollar index made yesterday’s marginal gain looked like nothing. The dollar euro exchange rate sank to a record low on Wednesday, which might negatively influence the inflationary picture in Europe. Crude oil was indeed on a wild ride (continuous chart on page 2 in attached PDF).
With a friendly early morning trading to touch the mid $114 level, it retreated a dollar lower before the big spike emerged on concerns of supply and demand. The bullish supply and demand report took crude oil to approach $115 for the first time. As it went higher quickly, it came down just as fast to touch today’s low at $112.19. It eventually settled at $114.90.

There was a nice pop in the technical picture today as follow through buying came in based on yesterday’s strong close. As volatility was the feature of today’s session, trading range was a whopping 570 points on K’08. The 9 and 50 day moving averages started to converge and the settlement was sitting right at the 9 day moving average level.
As K’08 open interest is just over 28,000 contracts 6 days to the first notice day, the cert stocks level has gone up to 985,404 bales with 127,219 awaiting review. We’ll very likely trade in consolidation ahead of the K’08 FND.