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December cocoa continued to retreat from 30 year highs on Wednesday and given the extent of the market’s overbought condition, a deeper correction back below $3,200 could be seen. The combination of bearish outside market forces and economic news that seemed to sour demand expectations a bit appear to be the main factors weighing on cocoa this week. The recent strength in the Dollar as the currency recovers from 14 month lows has also been undermining cocoa by lowering investor risk appetite for alternative assets. In fact, the selling in cocoa yesterday seemed to be part of a broad liquidation wave in a number of physical commodity markets that have risen sharply on Dollar weakness and are now being pressured by Dollar strength. The initial break in the Pound yesterday may have added an element of arbitrage related selling of NY cocoa into the mix. But waning macro economic sentiment tied to weaker than expected readings in consumer confidence and new home sales has also applied some pressure to cocoa prices. Part of the price gains in cocoa during the July through August timeframe were based on the idea that world economic conditions were recovering and with economic doubt surfacing again, it isn’t surprising to see cocoa give back some gains. In fact, cocoa prices up at these levels could acutely cut off cocoa demand from manufacturers. With investment demand for cocoa also tied closely to recent equity market gains, the sell off in the stock market this week is giving investors another reason to book cocoa profits.
TODAY’S GUIDANCE: The steep rally in December cocoa this month had clearly taken the market to an overbought extreme. The key reversal from the contract high last Friday suggests a near-term top has been set and a deeper correction is likely. But so far the selling in cocoa has been tempered and it’s a bit surprising there hasn’t been a more significant break given the bearish action in outside markets and weak macro economic news. But we suspect it will be hard for the market to ignore for too long news that Ivory Coast port arrivals are running about 97% above last season’s pace. While the general outlook is for cocoa production in the Ivory Coast to be below last season, this tight supply side view may start to fade if port arrival rates continue to show high deliveries of cocoa beans.
TODAY’S MARKET IDEAS: While buying on price dips in cocoa has trimmed losses this week, the technical setup leaves the market vulnerable to a more significant price correction. Stay on the short side of cocoa for now as we suspect harvest supply could apply some added price pressure and if today’s US GDP comes in below +3.3% cocoa could be further undermined by weakening demand expectations.
