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July cocoa has pulled back in the overnight trade on profit taking tied to the currency action which isn’t too surprising given the market’s near vertical climb over the last eight sessions. The bounce in the Dollar and the softer Pound has no doubt inspired some profit taking in cocoa, but sentiment has turned bullish and that’s likely to keep pullbacks short lived. The chart setup leaves July cocoa well positioned to eventually retest the April and February highs. Cocoa has vaulted higher from the mid-May lows as rising macro economic optimism tied to the rally in the equity markets and better than expected global economic data has been improving the demand outlook for chocolate. In fact, July cocoa may have found price support yesterday from news that a Cameroon cocoa grinder affiliated with Barry Callebaut bought 25% more cocoa beans for the season through April compared to year ago. A large part of the price gains in cocoa are currency related with the sharp upward move in the Pound recently attracting arbitrage related buying of NY futures while broad based weakness in the Dollar is raising the appeal of physical commodities like cocoa as an inflation hedge. However, it was a bit surprising that the May 26th COT report with options for cocoa actually showed the combine fund and spec net long position in cocoa falling by over 2,000 contracts in the past week. Although there have been reports of active trend following and index fund buying in cocoa over the last several sessions, the decline in open interest from May 26th should be a bit worrisome for the bull camp.
TODAY’S GUIDANCE: Long position holders should be prepared for July cocoa to set back a bit more if the Dollar stages a stronger recovery bounce or if there is some extensive profit taking in the Pound. But if macro economic optimism continues to build and improves the demand outlook for chocolate, we suspect July cocoa could ultimately test the February highs. Buying support levels for July cocoa come in near $2,575 and then near $2,530. On the other hand, a move above $2,668 will pave the way for a technical rally to the next resistance area between $2,700 and $2,720.
