After three consecutive days of gains, the US dollar index came to a halt, and ICE cotton futures staged a rebound from a two-week low. On June 25, the December contract, after hitting a low of 76.09 cents per pound, settled at 76.97 cents, up 0.93%. This rebound, though seemingly sharp, was driven by a short-term confluence of factors rather than a fundamental improvement in demand.
Short-Term Support from Dollar and Oil
The weakening of the US dollar was the most direct catalyst. Recent US inflation and other economic data dampened expectations for a Fed rate hike this year, halting the dollar's rally. For overseas buyers holding non-dollar currencies, dollar-denominated cotton became relatively cheaper, providing marginal price support. However, the sustainability of the dollar's weakness is uncertain—if subsequent economic data strengthens, rate hike expectations could resurface.
Rising oil prices indirectly supported cotton through the substitution channel. Crude oil gained about 2% on the day due to heightened Middle East tensions: a cargo ship was attacked near Oman, and the International Maritime Organization suspended evacuation of vessels stranded in the Strait of Hormuz, reigniting supply concerns. As the raw material for polyester fiber, higher crude prices increase the cost of synthetic fibers, potentially enhancing the relative competitiveness of natural cotton. However, this transmission effect lags, and the current price gap between cotton and synthetics has not yet reached a critical threshold for large-scale substitution.
The Fragility of Bargain Buying and Technical Rebound
StoneX senior vice president Bailey McHenry noted that after the sharp sell-off the previous day, the market saw technical rebalancing, particularly among speculative funds. Current price levels provided strong support, attracting buyers. While such bargain buying can drive short-term price increases, it is essentially a correction of an oversold condition rather than a signal of a trend reversal. Once prices rise to target levels for some longs, profit-taking could quickly emerge.
Export Data Rings the Demand Alarm
In stark contrast to the futures rebound, the USDA's weekly export sales report released the same day revealed weak demand. For the week ending June 18, net sales of current-season US upland cotton were 83,864 running bales, down 53% from the previous week and 61% from the prior four-week average. Net sales for the next season were 67,089 bales. Although shipments rose 20% week-over-week, shipments to China were only 12,248 bales, a low share.
This suggests that the current price rally is driven more by financial market risk appetite and speculation than by actual consumption. For textile mills and traders, the sustainability of this 'financial-driven' rebound is questionable. Should the dollar strengthen again or Middle East tensions ease, cotton prices could face renewed downward pressure.
Strategies Amid Bullish and Bearish Crosscurrents
In summary, ICE cotton has formed a temporary bottom around 76 cents per pound, but the 78-80 cent range faces strong technical resistance and hedging pressure. The market's true direction will depend on upcoming US economic data for dollar guidance and the evolution of geopolitical events in the Middle East.