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March cocoa closed firmer yesterday finding support from broad based strength in general commodity prices. It seems as if inflation sentiment is being revived a bit with crude oil at times pushing back above the $50 per barrel level yesterday as that seemed to also inspire buying in cocoa. Gains in equities and another upward thrust in the Pound yesterday have been outside market influences underpinning cocoa. While March cocoa continues to find buyers on price dips, there also seems to lack a strong bullish catalyst to push prices back above the $2,700 price level. It was also impressive to see cocoa hold up fairly well yesterday despite news reports of rain in parts of the Ivory Coast growing regions improving the outlook for mid-crop and possibly even helping to extend the main crop harvest beyond January. In fact, traders may be waiting to see if the Ivory Coast harvest supply gap to last season remains wide this month since it will likely be difficult to narrow such a wide supply shortfall after the main harvest peaks even if mid-crop production is good. Therefore, March cocoa may be contained within a fairly tight range until the fundamental outlook becomes a bit clearer. However, there is some speculation funds could allocate a larger portion of their portfolio to cocoa given the market’s good fundamental setup and if more aggressive fund participation occurs, it certainly has the potential to lift the market beyond recent resistance levels.
TODAY’S GUIDANCE: It’s been a bit frustrating to see March cocoa continue to trade in a contained range for the last several weeks, but as long as the supply outlook remains tight, we still have to favor the long side. While the market seems to be searching for the next catalyst, higher prices may be seen on greater fund participation or if it becomes clear that the Ivory Coast main harvest has peaked. While we remain bullish, the choppy trade action suggests buyers wait to buy dips or use option strategies to lower volatility risk.
