With May cocoa forging a very impressive upward extension yesterday, the price action this week leaves both the fundamental and technical setups positive. Given the sharp gains over the last two session, it won’t be surprising to see May cocoa pull back a bit on pre-weekend profit taking, especially if the Dollar bounces. But we suspect price corrections in cocoa could be short-lived, as there seems to be a variety of factors behind the market’s rally this week that could keep the bull camp in control. Yesterday’s gains were ignited by optimism for an economic recovery tied to the Fed’s liquidity plan, as the cocoa market had fallen sharply in February on fears that a deepening recession would curtail chocolate demand. The currency action this week has also had a key bullish factor impacting the cocoa market. A good portion of yesterday’s gains in cocoa were due to the steep fall in the dollar, which had triggered a wave of broad based physical commodity buying. In addition, cocoa is likely seeing price support from arbitrage related buying tied to the recovery in the Pound. With the Fed expected to add another $1 trillion to the economy in addition to the other government stimulus programs, cocoa is also benefiting from the resurgence of an inflation psychology. We suspect index funds will be lured back to the cocoa market as inflation concerns escalate, and if that occurs it could become a powerful bullish force. But even if a bounce in the Dollar causes cocoa to fall back, the market’s downside may be cushioned by a tightening supply view and lingering concerns over the spread of black pod disease damaging the mid-crop. The market has been shocked this week by a lower mid-crop output forecast by Ivory Coast pod counters. After heavy rains over the last several weeks, Nigerian farmers are the latest West African producers raising warning flags over the rising odds of a fungal attack.
TODAY’S GUIDANCE: With May cocoa running into strong resistance near $2,600 it’s not surprising to see the market trade weaker overnight. More chart-based profit taking in May cocoa is likely to be seen if the market is pushed under the $2,557 support level. While an inside trading day seems likely this session, May cocoa still looks to have more upside potential given the uncertainty surrounding the crop, especially with the Dollar’s recent reversal to the downside. Therefore, an eventual rally back to test $2,642 and possibly even $2,715 still seems possible.
TODAY’S MARKET IDEAS: Look for a sideways to lower trade this session on profit taking. But with the supply outlook uncertain, a rally back in May cocoa back to $2,642 can’t be ruled out, especially if the Dollar continues to sink.