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The cocoa market forged another very impressive upward extension in the trade on Wednesday and managed to pulse up in the face of continued weakness in the Pound. We also suspect NY cocoa has found some spillover support from the London cocoa market which has been pushed to 24 year high on mounting concerns over West African cocoa bean supplies. Despite the last two sessions, traders shouldn’t discount the potential impact that currency fluctuation can have on the cocoa market and in fact, we suspect overnight gains in the cocoa market have been trimmed by the weak action in the Pound. However, it also seems as if once again the market is building in a tighter supply view into sentiment. Funds were said to be active buyers over the last two sessions with bullish interest in cocoa likely being revived by the market holding a test of a technical support level and a closely followed private crop forecaster apparently predicting a smaller Ivory Coast crop. Certainly seeing Ivory Coast arrival pace still nearly 32% behind last year with the end of the main crop harvest just weeks away is providing an another element of speculative buying into the equation. It also seems like the market’s expectation for the global deficit is on the rise again and that would suggest that the fear of demand losses is still being held in check. We suspect part of the gains in cocoa this week can be tied to reports that Ivory Coast exporters are bidding up domestic cocoa bean prices to secure needs which also seems to be promoting supply shortage concerns. On the other hand, it seems as if supply issues have once again pushed aside any recession related demand concerns as the buying interest in cocoa over the past two sessions hasn’t been swayed by reports of weaker than expected chocolate sales from at least two major European companies.
TODAY’S GUIDANCE: The technical action in March cocoa has improved with a close back over the 200 day moving average and back above the $2,600 level. While some profit taking is likely to be seen after the rally over the last two sessions, it will be a test of the bull camp’s resolve to see if key support levels can hold in order to maintain the market’s upward momentum. Since the market has made several failed attempts to break above $2,720, a push through this level could inspire more aggressive buying by trend following funds. On the other hand, another failed upside breakout attempt could again trigger heavy profit taking.
