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March cocoa closed with solid gains on Monday, and with the global supply outlook tightening, the market may have more upside capacity if outside markets remain supportive. Cocoa certainly benefited from broad based commodity fund buying yesterday tied to the sell off in the Dollar. And with the Dollar waffling on both side of unchanged overnight, March cocoa has seen a stronger trade. If investors continue to reverse safe haven currency purchases in the Dollar, it will likely provide additional price support to March cocoa. It is also impressive to see cocoa moving higher overnight despite weak action in both the gold and oil markets, as such action normally tends to diminish the appeal of commodities as an inflation hedge. Even a weaker Pound overnight hasn’t appeared to undermine cocoa in the early going, which may mean the market’s fundamentals may be having more influence. Certainly the cocoa market was seeing spillover buying in connection to the strong rally in equity markets yesterday. If an easing of financial market anxiety is sustained, a lifting of the extreme negative sentiment in the financial markets seen last week could entice more investors back to commodities, especially to markets such as cocoa which have improving fundamentals. Despite the gyrations in the Dollar since mid November, March cocoa has been trending higher, which we suspect reflects an improvement in the market’s supply side setup. Ivory Coast cocoa arrivals for the 2008/09 season through Nov 23rd were down nearly 50% below the pace of a year ago, and this is beginning to raise concerns of a possible cocoa deficit in contract to widespread trader expectations at the start of the season for a cocoa surplus. We also suspect the cocoa market has been able to trade higher since the aggressive selling by index funds seems to have ebbed.
TODAY’S GUIDANCE: The technical action in March cocoa has continued to improve with yesterday’s gains. More aggressive chart based buying will likely be seen in March cocoa on a push through key overhead resistance points near $2,015 and then at the 40 day moving average which comes in near $2,136 today. In order to push through these key chart levels, March cocoa may need the support from bullish outside market influence, particularly a weaker Dollar. The promise of more economic stimulus from US, European and Asian governments seems to have revived some economic optimism. However, weaker than expected readings in today’s US economic data also has the potential to be a critical stumbling block for the bull camp.
