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While cocoa didn’t seem to find too much support from yesterday’s bullish currency action, the market seems to be having a much stronger positive reaction in the overnight trade suggesting a near-term low has been set. The Dollar has followed through weaker overnight and that is likely attracting more buying interest from investors seeking an inflation hedge. With the Pound up sharply, it also appears that arbitrage related buying is likely supporting the NY cocoa market. NY cocoa also seems to be gleaning some price support from a firmer London cocoa trade and talk of industry buying. While more of a technical bounce looks likely, we have doubts that funds will become aggressive buyers again unless macro economic conditions improve the demand outlook for chocolate. With equity markets continuing to waffle, yesterday’s reports on housing and manufacturing didn’t seem to significantly revive economic confidence, leaving the cocoa market lacking the strong macro economic optimism seen earlier in the month that was partly responsible for lifting cocoa prices to four month highs. The industry situation continues to leave traders without a strong buying incentive since growing conditions in West Africa are generally good and there doesn’t seem to be a significant crop problem developing. Expectations for a recovery in chocolate demand this year seemed to be a key factor behind the May/June rally in cocoa and unless the economic news over the balance of the week can revive this bullish demand side sentiment, we suspect a technically based price bounce in cocoa may be short lived.
TODAY’S GUIDANCE: With the market becoming oversold on the break, it’s not too surprising to see September cocoa build on gains in the overnight trade given the bullish currency action. A close back above the 100-day moving average at $2,518 in September cocoa will start to improve the market’s chart setup. But unless fund investors turn active buyers again, a technical bounce in cocoa may end up being short lived. After the swift sell-off seen last week, it might take a sustained and sharp decline in the Dollar and continued gains in the Pound along with a better macro economic view in order to lure strong fund participation back to the cocoa market.
TODAY’S MARKET IDEAS: On a purely technical basis, a close back above the 100-day moving average at $2,518 in September cocoa suggests a move back to the $2,615 to $2,661 price range may be possible.
