Cotton Finds Support at 76 Cents: Can a Weaker Dollar and Geopolitical Premium Sustain the Rebound?

The 76-cent level is emerging as a critical psychological support for the cotton market. On June 25, the ICE December contract hit a two-week low of 76.09 cents before rebounding to close at 76.97 cents, up 0.93%. This bounce, however, was not driven by a fundamental shift but by a confluence of three short-term forces: a weaker US dollar, geopolitical risk premium, and speculative short-covering.

Dollar and Energy: Two External Variables

The US dollar index ended a three-day winning streak on June 25, as market interpreted recent inflation data as reducing the likelihood of a Fed rate hike this year. A softer dollar makes US cotton more affordable for overseas buyers holding non-USD currencies—a factor that typically spurs inquiry and price-fixing activity in the short term.

On the same day, crude oil prices rose about 2% after a cargo ship was hit near Oman, reigniting concerns about the security of the Strait of Hormuz. The linkage between oil and cotton prices operates through the substitution effect: higher oil prices raise polyester fiber costs, indirectly enhancing the relative price competitiveness of natural cotton. This transmission mechanism is especially sensitive in spinning markets with high polyester substitution rates.

But caution is warranted. Both external variables are inherently temporary. The dollar's direction depends on upcoming economic data, while the Middle East risk premium will only persist if tensions escalate further. Once these factors fade, cotton prices will revert to their own supply-demand fundamentals.

Export Data: The Achilles' Heel of the Rally

The USDA's weekly export sales report, also released on June 25, told a very different story. For the week ending June 18, current-crop US cotton net sales were 83,864 bales, down 53% from the previous week and 61% below the four-week average. Next-crop net sales were only 67,089 bales. While shipments rose 20% week-over-week, new demand was clearly lacking.

China, a key buyer, took only 12,248 bales in shipments—a relatively low level. This reflects Chinese textile mills' cautious procurement strategy: amid volatile cotton prices and sluggish end-order recovery, buyers prefer hand-to-mouth purchasing rather than building large inventories.

The sharp drop in export sales means the current rally lacks solid support from real consumer demand. Speculative money can drive a one- or two-day bounce, but it cannot replace actual restocking by the supply chain.

Transmission to the Supply Chain and Strategy

For textile mills, the technical buying near 76 cents on ICE may provide some floor support for spot quotes in the short term. However, weak export data suggests limited upside potential. Mills should avoid chasing prices at the top of the rebound and instead use futures tools to lock in costs in the 75-77 cent range on a staggered basis.

For foreign trade companies, the dollar's weakening window is favorable for quoting new orders. But given the decline in US cotton export sales, overseas brands' appetite for cotton products may also be weakening. It is advisable to build exchange rate flexibility into quotations while closely monitoring competition from Southeast Asian spinning capacity.

For Buyers - Stagger price-fixing below 76 cents to avoid concentration risk. - Monitor Middle East developments; if oil prices continue to rise, consider increasing the proportion of cotton yarn purchases to hedge against polyester price increases. - Use ICE options to protect downside risk; current implied volatility is at moderate levels.

For Foreign Trade Companies - During the dollar weakness period, quoting in RMB or euros can capture additional margin. - Closely track US cotton export shipment data; if China's weekly shipments fall below 10,000 bales for two consecutive weeks, be alert to weakening external demand. - Incorporate geopolitical risk clauses into contracts, especially for sea freight orders involving Middle East routes.