There was no shortage of news for the cotton market to digest this week as ICE futures lost over 300 pts basis the K4 contract. Losses on Monday were re-couped on Tuesday ahead of the USDA's monthly WASDE report, which contained few surprises (decrease in US 13/14 production was expected) outside of a 1 million bale increase in China's imports. Given that China, however, has already imported nearly 2.0m MT through February, and with 5 more months of imports, WTO mandated quota, 4:1 import quota, and now 600-800k MT of additional processing quota, this threshold may yet be breached, despite the fact that most quota will be used for H2 2014 deliveries. Demand is further shifting to new crop at a discount, which is being reflected in the slowly-growing cert stocks, falling spreads and weekly export sales, which were net negative this week for the first time.
All this has helped to narrow the N-Z spread to close to 900 pts, well off the 1600 pts peak seen a few weeks ago and which was hard to justify given the (weak) state of physical market demand at the time. Mills are now getting a chance to fix against on-call sales at reasonable levels – fireworks as a result of K4 fixations look unlikely.
The Fed held an unannounced meeting at the beginning of March to discuss removing the 6.5% unemployment rate threshold as a condition for removing QE, and the consensus is that rate rises may not occur automatically after the end of QE (as Bernanke and Yellen have long emphasized), so investors have recently scaled back their expectations for Fed tightening in the near term. As a result, the USD has been weak of late with strong gains seen in the Australian Dollar and Brazilian Real. This should be supportive of commodities priced in those currencies.
