- Jo Earlam
- July 16, 2023
- 1:34 pm
- 10 min read
Another sideways week for Cotton
The difference between golf and government is that in golf you cannot improve your lie
CTZ23 81.22 – (-0.46)
CTH24 81.35 – (-0.40)
CTK24 81.32 – (-0.41)
CTN24 81.17 – (-0.40)
CTZ24 78.06 – (+0.05)
Zhengzhou WQU23 – 17,185 (-25)
Cotlook “A” Index – 92.60 (Unch)
Daily volume – 26,829
AWP – 65.81
Open interest – 179,223
Certificated stock – 8,926
Z23/H24 spread – (-0.13)
H24/K24 spread – (+0.03)
K24/N24 spread – (+0.15)
N24/Z24 spread – (+3.11)
December Options Expiry – 10th November 2023
December 1st Notice Day – 24th November 2023
Introduction
– It was another quiet week for Cotton with prices trading in a 413 point range between 78.97 and 83.10. Prices ended the week up just 5 points at 81.22. Futures volume was up from the previous week and averaged 35,486 futures daily.
– In options, call and puts traded about the same volume with implied at the money volatility dropping to 21.3% for the Z23 contract. This makes options as cheap as they have been since November 2020 when the spot Cotton price was trading about 70c/lb.
– EAP are of the opinion that volatility will drop even lower in the weeks to come, on account of the likelihood that the sideways price action is likely to continue for many more months to come! Low volatility is a sign of boring price action and is fully what we expect to happen! Back in 2016 we saw volatility drop to under 15%. Back then intraday price action was less than 100 points daily, when last week it averaged 196 points.
– Included below is the open interest in the September options which have just 33 days until expiration on the 18th August. It is a little known fact that this contract often has quite a lot going on because the options are very liquid since they trade against the Z23 contract.
– Lots of open bets between 75 and 80c against the puts and 80c for the calls. Most will likely expire worthless and if were going to guesstimate the Z23 close in 33 days time then just under 80c is probably where we would pitch it!
– Friday saw publication of the CFTC COT report in which Managed Money (MM) were good buyers of a net 10,306 contracts and taking their net long to 2,049 contracts. Between MM, Other and Non Reportables they hold a net long of 22,783 contracts!
– Interestingly, the fund buying interest did little to bolster the market despite the fact it was one of the bigger weeks for fund buying!
– In the interest of trying to anticipate what will happen to Cotton next we decided to take a look at the share prices of two of our favourites indicators of future price action for the Cotton market, namely Texhong and Weiqaio. They have been on a downward path since prices in Cotton peaked just over a year ago and they are both still languishing near their lows!
– In short summary, there is nothing on the horizon that the fortunes of textile companies or in turn the price of Cotton to get excited about.
– What did attract our attention in the last week was the breakdown in the US$ Index which ended the week below 100 and has broken to a new calendar year low!
– A weak US$ Index is historically a time not to be short commodities noting the inverse relationship between the two. For Cotton, we remain of the opinion that the fundamental bearish argument for Cotton currently outweighs the weak dollar/strong commodities argument with the outcome likelihood being one of prices going nowhere to lower!
– In recent years we changed the way of looking at seasons by looking at the 1st of the calendar year and ending 17 months later at the end of May incorporating futures months of the same season only i.e. Z, H, K & N. December is clearly the most important month as it is the effective front month for 10 of the aforementioned 17 months.
– This 23/24 year is now more than 6 months old and so far we have seen our high in January at 86.98. January highs since 1980 have occured 4 times and all were obviously inverse years where the high of the season comes 1st and the lows later. Moreover, all of the seasons had relatively tight seasonal ranges as we have been bleating on will happen this year.
– Our statistical analysis and study of the current open bets in the market suggests that our seasonal low has yet to come!
– The lowest seasonal range since 1980 was in the 81/82 season where the low was also seen in the January and only moved just over 11c/lb. Guesstimates for timing of the 23/24 seasonal low suggest the end of this year possibly January of 2024.
Conclusion
Z23 has traded in just over a 10c/lb range between 76.81 and 86.98 so far this calendar year. EAP suggest this contract is fully valued in the low to mid 80’s and maintain that end users should only consider a scale down long and/or “on call” fixations from the mid 70’s, to maybe into the 60’s at some point!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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