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Cocoa has fallen back overnight as a stronger Dollar and the market’s overbought condition seems to be inspiring more extensive profit taking. The fund buying in cocoa seen over the past few weeks could ebb for now, especially if the Dollar continues to gain on ideas that recent macro economic sentiment may have been too optimistic. The selling in the cocoa market last Friday seemed to be part of a broad based selling wave seen in a number of physical commodity markets that may continue into the early part of this week. The recovery bounce in the Dollar is encouraging some traders to book profits since a currency action diminishes the need to own commodities as an inflation hedge. The pull back in the Pound is also adding some arbitrage related selling pressure into the mix. Some of the selling in cocoa may be tied to the sharp decline in Euro-zone industrial production raising macro economic doubts and perhaps undermining the prospects for a recovery in chocolate demand. News that an Ivory Coast port strike ended late last week and Nigerian farmers predicting a 30% increase in the mid-season crop may be other factors to encourage some traders to take profits.
TODAY’S GUIDANCE: Friday’s price break in September cocoa did little to correct the market’s extreme over done condition leaving the market vulnerable to a more extensive profit taking break. In fact, cocoa’s overbought condition was reflected in the June 9th COT report with options for cocoa showing the combined spec and fund net long position rising nearly 8,000 contracts on the week to 26,106 contracts. With September cocoa pushing below support at $2,745 in the overnight trade, a more short-term selling looks possible. The first retracement of May low to June high range is back at $2,640 which may be reached if the currency action keeps the market under pressure and since support at $2,700 didn’t hold.
