Inverse relationship with cocoa to the US dollar

3-8-13 CO.jpgYtd cocoa prices are off just better than 6% but high to low prices have collapsed trading lower by better than 20% from their highs last fall. It is premature to draw a line in the sand at 2050 but it appears that we are finding buying interest this week. In the last 2 days prices have leaped 4% and as of this post they are trading at their 20 day MA; identified by the light blue line. This pivot point has served as resistance now for several months so to see consecutive closes above that level would be progress. I like the idea of scaling into bullish trade in July.
I have pointed out in past commentaries the inverse relationship with cocoa to the US dollar. The fact that the greenback is appreciating today breaking out to fresh 6 month highs and cocoa is still well bid perhaps there is a divergence in this correlation. Let’s see if the dollar can back off in the coming weeks if the relationship re-emerges. A move back to the 38.2% Fibonacci level represents a gain of 8.5% and I see that as viable over the life of the July contract.
Top producers of cocoa in the Ivory Coast and Ghana are both out of the market at the moment but are likely to need to sell in the next few weeks, limiting the scope for a major rally in my opinion. Just maybe the expectation of future sales has been factored into the market with the most recent decline. I do not see futures moving much beyond 2300/2350 with origin selling from higher levels. We would need to see an increase in demand which is improbable, a supply crunch brought about by crop damage or civil unrest…both of which are possible but unpredictable. View this as a trade as opposed to the start of a bull market in my opinion. Always remember commodities do not move up or down in a straight line.
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