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May cocoa settled sharply higher in yesterday’s trade as bullish outside market forces and positive technical signals combined to trigger a wave of speculative buying. Some end of the week profit taking in cocoa seems likely after Thursday’s move which may be inspired if today’s employment report comes in worse than expected. But there has been a distinct improvement in the macroeconomic psychology this week which appears to be boosting the investment appeal of cocoa as well as the outlook for overall commodity demand. Therefore, with the trade expecting a sharp decline in payrolls, it won’t be surprising to see cocoa prices recover even if the market initially dips off the data. It seems as if market sentiment has also been lifted by an increased global deficit forecast this week with talk of Ivory Coast farmers shifting to rubber production and away from cocoa supporting this longer-term view. But macroeconomic views rather than industry fundamentals seem to be having the most impact on cocoa right now. In fact, with some US and UK data coming in better than expected recently along with a $1 trillion stimulus commitment from the G20 and a change in the US accounting rules seem to be fostering the idea that the US may have weathered the worst of the recession and this outlook clearly benefited cocoa in yesterday’s trade. The strength in the Pound likely provided some arbitrage related buying to cocoa as well, but the plunge in the Dollar and the jump in oil prices yesterday mostly seemed to be raising the appeal of physical commodities such as cocoa as an inflation hedge. The pulse higher in cocoa prices yesterday certainly leaves the market in a bullish technical posture and if a positive global economic view continues to gain traction, it could be enough of a catalyst to eventually lift May cocoa back to the February high.
TODAY’S GUIDANCE: Today’s price direction will likely be guided by the action in both the equity market and the Dollar with all markets likely to be focused on the US employment data this morning. Yesterday’s breakout above $2,626 gives the bull camp technical leverage and a close over $2,715 puts the next upside target near $2,900. Given cocoa’s chart strength, price pullbacks are likely to be short lived as we expect funds to be buyers on price dips. Index funds have started to increase their net long position in cocoa, but their position still remains well below peak levels seen last year. If a more positive macroeconomic view does take hold and inflation concerns escalate, we suspect increased index fund buying in cocoa could potentially become a significant bullish factor.
TODAY’S MARKET IDEAS: Expiration of May cocoa options could add to market volatility today. Some pre-weekend profit taking possible, but technical action remains strong. Near term resistance for May cocoa comes in near $2,715 and again at $2,770 with support at $2,671 and then $2,626.
