CTZ22 – 86.38 (-0.12)
CTH23 – 84.56 (-0.17)
CTK23 – 83.97 (+0.18)
CTN23 – 83.34 (+0.39)
CTZ23 – 78.40 (+0.25)
Zhengzhou WQF23 – 13,105 (-25)
Cotlook “A” Index – 104.50 (Unchanged) – From the 9th November
Daily volume – 49,824
AWP – 65.46
Open interest – 230,832
Certificated stock – 880
Z22 / H23 spread – (+1.82)
Z22 / Z23 spread – (+7.98)
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– Unsurprisingly it’s been a busy week so far as the GSCI roll period being in full flow and ending tomorrow. The November WASDE caused a knee jerk move lower in Wednesday’s trade.
– Volume has been massive and open interest in H23 now exceeds Z22 by circa 35k contracts and by definition of holding the highest open interest, is the effective front month. There are just 9 more trading days until Z22 1st notice day (Wednesday 23rd November) and anyone left trading this contract after this week would be wise to stay away if at all possible!
– The Z contract was the effective front month from the beginning of June until the end of October on account of holding the highest open interest being a period of 5 months! This calendar year it has traded in a huge range of 63.58c/lb between 133.79 and 70.21.
– This is remarkable for the fact that this more than twice the average range for December contracts this century which has an average range of 28.66c/lb! It is also the futures month that is the most relevant of the trading year on account it is the month which holds the highest open interest for 5 months of the season, versus 3 months for March and 2 each for May and July.
– The November WASDE saw a small reduction in global consumption from 115.60 million bales to 114.95. Whilst this is a move in the right direction it is simply far and away from reality and every cotton trader knows it!
– Today’s October US Consumer Price Index figure came in at 7.7% YoY which was below the expected figure of 8%. This shows that the Federal Reserve’s rate hikes seen over the course of the year may well be doing their job of reining in inflation and equity markets reacted very favourably on the back of this!
– At the same time the US $ Index sold off hard today and is at a 2 month low having topped out at 114.78 at the end of September. Some are suggesting the massive bull run is over for the US dollar which would be supportive for commodities!
– The weekly USA export sales report was actually a bit better than expected at 146k RB. China and Pakistan led the list of buyers.
Thanks to our friends at IAG for pictorial evidence of the fact!
– The CFTC “Cotton on Call” report detailed on the link below showed there to be a big reduction in the net unfixed position against the December contract and of no surprise in view of the imminent expiry of this contract.
– Between Z22, H, K and N23 the net imbalance is 47,236 contracts unfixed “on call” sales and not particularly relevant for future price direction noting it is about average in the 22 years of available data.
– EAP have a delegation at the ICA Conference in Las Vegas this week and have found it very hard to find anyone that is positive around demand right now. Most merchants are focused on managing problems with very little new sales or enquiry.
– Furthermore, we have good information that there is a raft of new arbitrations on the horizon, and this looks likely to increase in magnitude over the coming months.
Conclusion
The cotton market has found resistance this week just under 90c/lb basis Z22 and 87.15 basis H23. We maintain that any rallies (were we to see them) are expected to fail in the early to mid 90’s basis Z22. For H23 we see prices in the mid to high 80’s as fully valued and any move for this contract into the 90’s as an outright selling opportunity. Our bearish stance is based upon a lack of demand which will eventually be addressed by continued monthly WASDE reductions to world consumption. We would not want to be short Cotton long term under 70c/lb!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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