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May cocoa ended a bit firmer last Friday mostly finding support from the currency action although trading was thin ahead of the holiday weekend. Profit taking after futures reached a five month high sent cocoa prices sharply lower last week. However, we still suspect the market is vulnerable to more profit taking from both a technical and fundamental level. So far the market has been able to hold above the key chart support price range of $2,584 to $2,567 as a push below there is likely to trigger more aggressive chart based selling. Supportive currency action seemed to be the main factor providing a lift to May cocoa last Friday. But a sharp rally in the Dollar and break in the Pound overnight has pressured cocoa. In fact, more aggressive arbitrage related selling in cocoa could be seen since expectations for lower UK rates could put more pressure on the Pound this week. The fundamental news was mixed last week but we still see some cracks forming in the bull case. Most reports showed the Ivory Coast supply gap narrowing with cocoa bean arrivals to ports through Feb 8th running 19% to 21% below year ago levels, compared to over a 30% supply deficit a month ago. We get the feeling that we have moved past the most bullish aspect of the fundamental case, especially since the Ivory Coast mid-crop seems to be developing well. Clear signs of worsening macroeconomic conditions could once again stir up concerns over the demand outlook for chocolate this year. The trade is jittery that retail chocolate demand won’t be as strong this Valentines as in past years due to the economic downturn and any hint of this over the newswires this week could undermine cocoa. A report that Asian cocoa butter ratios have dropped to their lowest level in five years also raises doubts over the demand outlook for chocolate this year.
TODAY’S GUIDANCE: The February 10th Commitment of Traders with Options report for cocoa showed the “combined” spec and fund net long position at 30,030 contracts as of early last week. The report showed trend following funds increased their net long position by over 2,800 contracts despite the price break early last week and that gives some hope to the bull camp. But with Ivory Coast supplies looking a bit less tight and economic conditions possibly denting chocolate demand, it looks as if the bull camp is losing their fundamental advantage. Worsening global economic and European financial conditions could become a negative for all physical commodities including cocoa. If the currency action stays bearish, it will leave May cocoa in danger of eventually breaking under critical support at $2,567 and that is likely to inspire more aggressive chart based selling.
