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With a bearish fundamental view becoming entrenched, the odds are rising for the cocoa market to make its way back toward the March low. With July cocoa breaking below critical support at $2,300 in the overnight trade further weakens the technical structure and sets the market up for an eventual test of the March lows. The ICCO’s predictions for a sharp drop in world cocoa grinding and for the global recession to shift the cocoa balance back to a surplus next season has turned market sentiment bearish this week. In fact, the trade continues to ignore warnings that too much rain in the Ivory Coast raises the risk for an outbreak of black pod disease. But until disease problems are documented, the cocoa market may continue to be undermined by the prospect for high mid-season cocoa crops in West Africa due to generally favorable weather conditions. Yesterday’s weak US retail sales data and housing news showing a jump last month in homes facing foreclosure, seemed to cast doubts on the economic optimism that has been supporting a number of commodity markets which also seemed to inspire additional selling in cocoa. It also appears that heavy selling in the London market yesterday, with July cocoa being pushed below a critical chart support level, seemed to add to the selling intensity in the NY market.
TODAY’S GUIDANCE: With July cocoa falling below the $2,300 level and given the market’s bearish fundamental backdrop, the price risk remains skewed to the downside. In fact, if macro economic optimism is further shaken by today’s jobless claims data or PPI report, it could intensify the selling interest in cocoa. As a non-essential commodity, it looks as if the trade is pricing in much deeper demand destruction that could eventually pressure July cocoa back to the March lows.
