ICE Cotton Technical Rebound: Weaker Dollar and Declining US Cotton Ratings as Dual Drivers

On July 27, ICE cotton futures edged higher, with the active December contract settling at 80.88 cents per pound, up 0.9 cents or 1.1%. The rebound was driven by technical buying and a slight pullback in the US dollar index. In the previous week, cotton prices had risen for four consecutive sessions but fell over 1.5% on Friday due to weak export sales data and a stronger dollar.

Market Driver Analysis

The weaker US dollar was a key catalyst for the rally. On July 27, the dollar index declined slightly against a basket of currencies, making dollar-denominated cotton cheaper for overseas buyers and spurring short-term buying interest. A StoneX risk management advisor noted that the market was testing key support levels after Friday's correction, prompting technical traders to step in.

However, the sustainability of the rebound is questionable. US cotton export sales data already showed signs of weakness last week, which was the direct cause of the previous pullback. China, the world's largest cotton importer, remains the core variable influencing ICE cotton direction. Currently, China's textile end-demand is recovering slowly, downstream yarn inventories are high, and the willingness to replenish imported cotton is not strong.

US Cotton Crop Conditions and Brazil Production Outlook

The latest USDA weekly crop progress report showed that as of July 26, US cotton good-to-excellent ratings stood at only 46%, up 1 percentage point from 45% the previous week but far below 55% a year ago. The squaring rate was 81% and the boll-setting rate was 45%, both slightly below the five-year average. The low good-to-excellent ratings imply downside risk to future yields, providing some floor support for the market.

In the Southern Hemisphere, consultancy StoneX expects Brazil's 2026/27 cotton production to reach 3.83 million tons, down 1.5% year-on-year. Although planted area is expected to expand, the El Niño weather phenomenon may damage yields. The expectation of lower Brazilian production somewhat alleviates global oversupply pressure, but the absolute volume of 3.83 million tons remains historically high, offering limited support to ICE cotton.

Downstream Transmission and Supply Chain Impact

For domestic Chinese cotton textile enterprises, the technical rebound in ICE cotton has not yet translated into actual import costs. The Cotlook A Index stood at 89.10 cents per pound on July 27, down 125 points, indicating weak spot market follow-through. The spread between import cotton arrival prices and domestic spot prices continues to narrow, and textile mills remain cautious, purchasing only on an as-needed basis.

From a supply chain perspective, short-term price fluctuations do not change the medium-term weak pattern. Global cotton stocks-to-use ratios are high, while end-apparel consumption growth is slowing. Operating rates in major textile exporting countries such as China, Vietnam, and Bangladesh have not reached full capacity, limiting their ability to absorb raw materials. Each technical rebound in cotton may become an opportunity for upstream ginners and traders to hedge and lock in profits.

Practical Recommendations

For Buyers - The current ICE cotton rebound is mainly driven by technical factors and dollar movements, with weak fundamental support. Avoid chasing prices and consider waiting for prices below 80 cents/lb before making partial basis purchases. - Monitor changes in US cotton good-to-excellent ratings. If they persistently stay below 45%, consider increasing forward contract purchases to lock in relatively low prices. - With Brazilian new crop cotton coming to market soon, South American cotton offers more competitive pricing. Prioritize Brazilian cotton as an alternative.

For Foreign Trade Enterprises - The short-term direction of the US dollar remains uncertain. For signed orders, use forward settlement or hedging tools to mitigate the impact of exchange rate fluctuations on profits. - If holding long ICE cotton positions, consider gradually reducing positions above 82 cents/lb, as weak export sales and high global inventories will cap upside potential. - Pay attention to the release pace of China's sliding-duty cotton import quotas. Once quotas are issued intensively, they will trigger a wave of import purchases, providing an opportunity to sell.