JUNE 26, 2013

DAILY EDITION

GLOBAL COTTON PRICES STABLIZE AS CHINA PANIC WANES

The market panic of Monday faded on Tuesday with the USD falling from Mondays
highs and global equity markets generally rebounding. Chinese mills appeared to still be
approaching new purchases of imported cotton from consignment of origin purchases
cautiously. This is not surprising given what has occurred over the past 4-5 days.
Chinas Central Banks statement pledging cash infusions to those banks which are
following regulations seemed to calm the markets. The Shanghai Composite Index had
posted early morning losses of near 6% before rallying back to minor losses. One
interesting observation, the Central Banks move to rein in shadow lending and the cash
crunch it triggered occurred at the same time the Yuan exchange rate appears to have
peaked, the Yuan hit a record high last Thursday at 6.1203 and has since fallen back to
6.1449. The Yuan has been appreciating against the USD over the same time frame as
the US Federal Reserves different Quantitate Easing programs, QE I, QE II and QE III.
The QEs have had a considerable effect on China caused by the launching of one of the
largest carry trades in history as record inflows of cheap dollars moved into China. This
was seen in the large net inflows of foreign exchange over the past 6 months but the
growth appears to have slowed significantly in May when net FX purchases slowed to
66.86 billion Yuan from 294.35 billion in April. The drop follows the governments
crackdown in May of over invoicing of exports and imports which allowed hot money to
flow in and out of China without government control.
The Federal Reserves move to start to taper its QE program began at the same time
which may have combined with the Chinese governments efforts to spark an exodus of
the massive carry trade which has been underway for a prolonged period. This would
help explain the possible peak in the Yuan/USD exchange rate. The question is how fast

will it take for the carry trade to unwind, economist argue that either China has to tighten
enough to assure Yuan returns which pay for the higher cost of dollar funds or exports
have to expand. It appears that such a tightening has begun but can exports rise fast
enough. It is clear that the large FX movements of the past 30 days and the Yuans
record high against the USD has created a sizeable hurdle for Chinese exporters if the
Yuan doesnt decline soon. Contrary to some logic in Washington the Yuans
appreciation over the past 30 days seems to have been driven by unusual forces and
the move to stop it may be at the root of the current action.
The Chinese Reserve offered a catalog of 110,657 tons on Tuesday which included
22,408 tons of imported cotton. A total of 38,661 tons were sold including the entire
catalog of imported cotton. Since May 6th over 372,000 tons have been sold by the
Reserve creating additional sliding scale import quotas of near 570,000 bales. A return
of stability will likely lead to a return to buying imported styles by Chinese spinners, if
that did not already happen Tuesday.
While Chinese spinners are building up additional buying power other spinners have
increased their activity, Indonesia has been a buyer of African Franc Zone and
Australian descriptions while Bangladesh has been an active buyer of Australian and
Uzbekistan styles. Despite the Rupees weakness south Indian mills are showing new
interest in African Franc Zone descriptions. The sharp rise in Indian domestic prices
have caused nearby export offers to loss their competitive position to African Franc Zone
styles.
Many of the hardest hit currencies continued their late Monday rally against the USD as
the Brazilian Real reached 2.2075 before the rally faded slightly, the Australian Dollar
reached .9277 and the Indian Rupee was steady at 59.675 per USD. Domestic prices in
Australia have now retreated with the 2014 crop falling back to 473 which halted
additional movement of the crop for the moment. 2015 crop year prices have fallen back
to 420, an unattractive level for growers.
In the USA the West Texas region is now hot and dry with no additional moisture in the
current 7 day forecast. Wind gust of up to 40 MPH are depleting soil moisture rapidly.
The US crop is currently rated as 23% poor and very poor, 34% fair, 35% good 8%
excellent. Chinese weather has turned excessively wet in the southeastern areas of the
Eastern belt.
ICE futures experienced a 1,553 net decline in Open Interest following Mondays action.
Deliveries against July increased as 1,030 additional notices were issued. Certificated
stocks increased further to 576,799 bales with an additional 49,868 bales pending
review.
December futures found support, as expected, in the 82/84 area as the global panic of
the last several days eased allowing markets to focus back on fundamentals. The rally in
December began in Asian trade and increased in US trade. December traded in a range
of 83.05 to 85.00 closing near the highs at 84.95 which reflected gains of 177 points and

December almost experienced an outside range reversal missing it only by a few points.
The December 2014 contract also found support in a range of 77.45 to 78.39 and closed
93 points higher at 78.38. The Dec 2013/March 2014 and May 2014 spreads increased
their invert.
Tuesdays price action illustrates the support values are likely to find in the 82/84 area,
under normal market conditions. Price volatility has been increased by the Federal
Reserve comments and the range of reactions this has triggered around the world.
Tuesdays action should also ease the pressure on the Managed Funds to liquidate and
help to stabilize their position. We continue to expect the December contract to find
support on moves into the 82/84 area and face stiff resistance as has been displayed
near the 88/90 area.

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