Cotton pierced a long-term technical resistance to hit a fresh three-month high on Wednesday as speculative and light mill buying helped fuel a year-end rally. Cotton rose for a third straight session and the most-active March cotton contract on ICE Futures US settled up 0.66 cent, or 0.9 percent, at 77.06 cents per lb.
That is just shy of the intraday high of 77.07 cents, its loftiest level since September 19 when the market hit 77.34. It first hit those three-month highs on Monday on light volume before the markets shut for the Christmas holiday. Volumes were still low again on Wednesday, with just under 8,000 lots traded on the day, with many market participants out for the Boxing Day holiday.
The market was on a firmer footing after piercing with conviction its 200-day moving average at 76.53 cents. It was the first time the front-month has breached that long-term technical resistance since July last year. "Having closed above 76 cents, that opens the door for 78 cents. We'll see what exports are like on Friday," she said. The weekly export data over the past six weeks has provided some much-needed optimism for the bulls. China, the world's largest textile market, has accounted for about half of the weekly sales. There has been little producer hedging to cap the year-end rally. Prices have risen over 10 percent over the past month. "On any modest breaks, we've had some light mill business. Indonesia was doing some buying yesterday. And the producers have sold all they want to by the end of the year," said Sharon Johnson, cotton specialist at Knight Capital.
On the charts though, the market was overbought, with its relative strength index (RSI) hitting 70, a level seen by technicians to indicate buying has been overdone for now. Open interest dropped by 941 to 166,099 on Monday, before markets shut for the Christmas holiday, reflecting a flurry of short covering by speculative investors. Fresh longs have been put on in recent weeks too.
Cotton showed surprising resilience to a weaker grains market. Wheat prices continued to be plagued by lacklustre export demand. But its performance was in line with the broader commodity market as oil rallied more than 2 percent to its highest level in more than two months on hopes that US lawmakers will hammer out an budget agreement to avert a raft of spending cuts and tax hikes due to come into effect next week.
With just days to go, President Barack Obama will cut short a vacation to return to Washington on Thursday and hold fresh talks. Many economists say the fiscal measures could tip the world's largest economy back into recession. Some cotton investors are betting on higher prices because they expect US farmers to plant much less cotton next spring in favour of higher-priced grains. That, they hope, will help to eat into the record global surplus expected by next July. Farmers and merchants remain concerned that demand for natural fibres will continue to weaken as clothing companies switch to manmade materials.