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The cocoa market seems to be benefiting from the ongoing weakness in the Dollar and expectations for a global recovery which may be enough to eventually support a move in December cocoa back to key resistance if outside market influences remain bullish. December cocoa has been confined to a trading range over the last month but the market could attempt to retest the $3,000 price level if the macro economic optimism that seems to have been revived this week, continues to build. Early strength in equities yesterday despite a disappointing US retail sales reading was certainly a key factor providing a lift to cocoa in Thursday’s trade. In fact, with industry news thin, a tighter correlation between cocoa and equities has developed and we suspect cocoa will need the upward price leadership in the stock market in order to initiate a leg higher move. Rising investor risk appetite tied to the weak price action in the Dollar continues to attract investment flows to cocoa. Bullish sentiment toward cocoa demand has been stoked this week by the Fed’s positive outlook on the US economy and surprisingly strong 2nd quarter growth rates from both France and Germany. A report that Barry Callebaut, a major chocolate manufacturer, bought 25% more cocoa beans from Cameroon in the year ending in July than the previous period may have also raised hopes that global grind numbers are set to improve. Some supply side concerns may have also been stirred up by reports of quality problems with the Ivory Coast mid-crop. But the market really hasn’t been that interested in classic physical supply issues or even slow arrival rates at several producers as macro economic views and outside market influences continue to be the primary driver of price direction.
TODAY’S GUIDANCE: It looks as if the sideways trade in cocoa over the last several weeks has corrected the market’s technically overbought condition and that could give the market some further buying capacity. Trend following funds have been a major buyer of cocoa and a breakout above the critical $3,000 price level could trigger aggressive chart based buying. While we still think cocoa looks fundamentally expensive at these price levels, it looks like support at $2,800 has a good chance of holding as long as financial market trends remain supportive. However, in order to keep cocoa well bid up at these price levels better than expected results for today’s reports on CPI, industrial production and consumer confidence may need to be seen. Otherwise, data that undermines the bullish macro economic view could prompt some profit taking.
TODAY’S MARKET IDEAS: Without bullish outside market support Dec cocoa could be vulnerable to some end of week profit taking.
