The cotton market is being led by the dollar. On September 4, the ICE December cotton futures contract closed down 0.12 cents at 86.33 cents per pound, after touching a low of 85.68 cents, the weakest since August 19. The weekly loss exceeded 5%, marking the largest weekly decline in recent months. The direct driver was stronger-than-expected U.S. nonfarm payroll data, with the unemployment rate steady at 4.1%, showing labor market resilience, which boosted the dollar index and pressured dollar-denominated cotton futures.
Market Context
This decline is not isolated. Earlier this week, cotton futures hit a two-year high on deteriorating crop prospects and El Niño weather concerns. However, weak U.S. export sales data released by the USDA on Thursday, coupled with a stronger dollar, quickly shifted sentiment. Trader Keith Brown noted that the decline may not be over, with position adjustments ahead of the long weekend adding to volatility. Attention now turns to the USDA's monthly supply-demand report due next week, with some investors squaring positions to avoid uncertainty.
Industry Impact
For the textile supply chain, short-term cotton price fluctuations directly affect yarn and fabric costs. ICE deliverable stocks remained flat at 63,092 bales, indicating steady physical delivery demand, but the sharp futures swings have transmitted to the cash market—the Cotlook A index fell 225 points to 96.00 cents per pound on September 4, a larger drop than futures, suggesting limited acceptance of high prices and a wait-and-see attitude among buyers.
From a macro perspective, cotton moves closely with grains. CBOT wheat stabilized after retreating from a 3.5-year high, while corn fell, offering no directional cue for cotton. A stronger dollar reduces export competitiveness for producing countries and erodes price advantages for U.S. cotton. For major importers like China, dollar appreciation may raise import costs, but domestic cotton pricing is more influenced by local supply-demand dynamics and reserve policies, so the transmission of external volatility may be limited.
Notably, the potential impact of El Niño has not faded. Although short-term prices are pressured by macro factors, weather risks could resurface during the peak downstream demand season. If the USDA report lowers production estimates, cotton prices may find support; conversely, if the report is neutral or bearish, combined with weak exports, prices could decline further.