ICE cotton extends rally on pent-up demand, short-covering

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* Drop below 80 cents lured back buyers

* Prices have retraced ground lost in 9-day selloff

* July cotton pierces long-term moving averages

NEW YORK, June 4 (Reuters) – ICE cotton rallied in hefty volume for a second straight day on Tuesday as traders ran to cover short positions and foreign mills returned to buy fiber after the market’s longest selloff in years.

Prices rallied almost 5 percent to as high as 86.38 cents per lb, the loftiest in just over two weeks, on pent-up physical demand after prices sank to four-month lows below 80 cents on Friday, the end of a nine-day losing streak.

“U.S. prices got competitive enough to sponsor buying from overseas, and it looks like we’re seeing short-covering on top of the new buying,” said Sharon Johnson, a cotton specialist with Knight Futures.

The most-active July cotton contract on ICE Futures U.S.

 rose 2.2 cents, or 2.7 percent, to settle at 84.56 cents per lb.

A whopping 50,500 lots changed hands, more than double its 30- and 250-day averages. Volumes will remain high until July options expiry on June 14, traders say.

The two-day rally means prices have recovered almost all the ground lost during nine days in May.

The 80-cent level was considered “magical” for luring back buyers. Traders can buy ICE cotton for July delivery and sell to mills in China, the world’s No. 1 textile market, at as high as $1.30 per lb.

That is still well below the $1.40 per lb price tag for the state reserve’s massive stockpile.

“The drop in July did some magical things. It allowed the Chinese arbitrage to be played,” a U.S. broker said.

On Tuesday, technical buying accelerated after prices pierced short- and long-term moving averages. Traders also noted that July’s narrowing spread with December, which represents the 2013/14 crop, may spur further buying by foreign mills.

The July-December spread came in to 0.88 cent per lb, from close to 2 cents on Monday.

Fiber continued to outperform the broader commodities market , as strength in Brent crude and base metal prices offset weaker precious metals.

  (Reporting by Josephine Mason; Editing by Dale Hudson)

Source: Reuters

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