When the dollar index jumped on strong jobs data, international cotton prices fell in response. On September 4, the ICE December cotton futures settled at 86.33 cents per pound, down 0.14% on the day, after touching a two-week low of 85.68 cents. The weekly decline exceeded 5%. This move was not an isolated futures fluctuation but the result of a confluence of macro-monetary factors and industrial fundamentals.
Macro and Exchange Rates: A Strong Dollar Pressures Cotton
The US August nonfarm payrolls grew sharply, while the unemployment rate held at 4.1%, showing a resilient labor market that boosted the dollar index. For dollar-denominated cotton, a stronger dollar raises purchase costs for buyers holding other currencies, dampening demand. Historically, the dollar index and commodity prices show a significant negative correlation, and cotton is particularly sensitive. After the jobs data, ICE cotton fell, confirming this transmission logic.
Notably, dollar strength may not be short-lived. If US economic data continues to improve, the Fed might keep rates higher for longer, sustaining dollar strength and pressuring cotton prices. For Chinese importers, a stronger dollar means higher import costs, possibly prompting some to shift to domestic spot purchases or adjust procurement schedules.
Supply-Demand Fundamentals: Weather Premium Fades, Weak Demand Dominates
Cotton futures hit a two-year high in late August on El Niño weather concerns and fears of deteriorating crop prospects. However, as time passed, the weather premium has been given back. The USDA's Thursday export sales report was weak, indicating that actual demand failed to keep up with price gains. This highlights a key contradiction: the supply-side story (weather-induced crop losses) has not yet fully materialized, but demand is already resisting high prices.
ICE data showed that deliverable stocks of No. 2 cotton futures contracts stood at 63,092 bales as of September 3, unchanged from the previous day, indicating no significant delivery pressure. But stable inventories also mean a lack of fresh buying interest. In surrounding markets, CBOT wheat futures stabilized after pulling back from a 3.5-year high, while corn fell. Weakness in the grain complex also dampened sentiment for cotton.
Market Focus: USDA Report and Position Adjustments
The upcoming USDA monthly supply-demand report is the key short-term catalyst. Traders expect some position squaring before the report. Keith Brown, president of Keith Brown and Co., noted that the decline is related to the long weekend, but the downtrend is not over. This suggests speculative funds may reduce risk exposure ahead of the report, increasing price volatility.
For industry participants, the USDA report will provide clearer guidance on global production for the new season. If the report raises production or lowers consumption, prices could fall further; conversely, if weather impacts are confirmed, prices may find support. Current market sentiment is bearish, but the risk of an upside surprise exists.
Spot Market Weakness Reflects Chain Transmission
On September 4, the Cotlook A index was 96.00 cents per pound, down 225 points. The spot price decline was larger than futures, indicating thin trading and weak mill buying interest. This simultaneous decline in futures and spot means downstream acceptance of high cotton prices is limited, squeezing margins. For domestic Chinese spinners, falling international cotton prices may ease some cost pressure, but RMB exchange rate fluctuations warrant attention.