The price of cotton has surged amid global demand and supply issues

18 January 2022, 02:40

Market Focus

U.S. markets were closed on the 17th in observance of Dr Martin Luther King day and markets will resume trading on the 18th. The benchmark U.S. 10-year Treasury yield edged higher to 1.811% and the 30-year Treasury yield also edged higher to 2.14%. China released its fourth-quarter GDP for 2021 yesterday and the nation saw an 8.1% growth, year over year. However, retail sales figures missed expectations by about 2%. Furthermore, the central bank of China has decided to lower medium-term loan rates in order to prevent an economic slowdown. The current medium-term loan rate set by the PBOC sits at 2.95%, which the central bank is lowering by 10 basis points to 2.85%.

The cryptocurrency market once again retreated slightly after yesterday’s trading. Bitcoin lost close to 2% and is currently trading below 42,200. On the other hand, Ethereum experienced a deeper drop by 4.15% and is currently trading at 3210.

Main Pairs Movement

The Dollar Index recovered from last Friday’s low and is currently trading above 95.25. Continued rising treasury yields have propelled the Dollar. A parallel shift of the yield curves could further fuel the Dollar’s demand.

Cable continued to drop amidst a stronger Dollar across the board. Strong selling pressure appeared once the European session began.

Cotton has gained steam over the past month, as global demand for the commodity continues to rise amid a supply interruption due to unfavourable weather conditions.

Natural gas has resumed trading around 4.11 as the supply chain issue, which appeared last week, eases. Demand for the commodity remains high, but it remains to be seen if the commodity will recapture the 6.6-dollar mark of late 2021.

Technical Analysis

GBPUSD (Daily Chart)

The GBP/USD pair edged lower on Monday, following last Friday’s sharp retreat from a three-month high above the 1.373 level. The pair was surrounded by bearish momentum and dropped to a daily low during the Asian and European sessions, staying relatively quiet below 1.3700 as it headed into the New York session. At the time of writing, the GBP/USD pair started to see fresh selling and targeted the 1.3600 area. Cable was last seen trading at 1.3645.

On the technical side, the RSI indicator reads 63.35 as of writing, suggesting bulls are still robust at the moment. In conclusion, we think the market will be bearish as the pair failed to gain sustained strength beyond the 200 DMA and the pair could extend its downward correction toward 1.360.

Resistance: 1.3736 (200 DMA), 1.3830, 1.3900

Support: 1.3600, 1.3500, 1.3400

COTTON (Monthly Chart)

Cotton continues trading with a positive bias, and it is for the first time in a decade when cotton prices have fetched farmers above $100, not to mention the current price near $120. The multi-month price rally was mainly because of the surging demand post-COVID recovery, followed by a drastic fall in production due to unfavourable weather conditions. However, due to expensive offers, there are chances of an increase in selling interest as the market prices are quite lucrative. Therefore, a correction is expected in the next few weeks.

On the technical front, cotton prices have breached the 150% Fibonacci and are approaching the 161.8% resistance. The RSI reads 74.73, suggesting that cotton is highly overbought and that cotton prices are highly likely to experience a correction in the near term. We expect the price of the cotton to drop to around $95 if it is blocked by the 161.8% or 176.4% Fibonacci, and the price will further decline to normal (around $66) around Autumn 2022, when the season for cotton harvest begins.

Resistance: 123 (161.8% Fib), 130 (176.4% Fib)

Support: 105 (123.6% Fib), 95 (100% Fib)

Natural Gas (Daily Chart)

In last week’s trading, the price of natural gas surged to monthly highs around $4.80, though it dropped sharply in the coming days, the price actions remain above $4.00 per MMBtu. Recent volatility in the natural gas price derived from the winter weather expectations, the potential for extreme weather events such as the latest cold snap in northeast America, and a rise in demand for natural gas imports in Europe and Asia. As the supply chain bottleneck is expected to ease in the second half of 2022, the natural gas demand is likely to remain resilient in the short term, but will slightly fall once the supply catches up with the demand.

On the technical side, the natural gas price has broken through its past resistance of $4.00, once bounced off the next resistance at $4.80, and is lingering around $4.20 per MMBtu as of writing. The price action is now above its 20 and 200 DMA, and just slightly below the 50 one. The RSI reads 53.13, suggesting a neutral-to-bullish sentiment. The uptrend of the pair seems convincing, eyeing the $4.80 price level.

Resistance: 4.80

Support: 4.20, 4.00, 3.55