Cotton Recent Fall Presents an Interesting Buying Opportunity

Cotton is an important agricultural crop used for the apparel industry. Cotton-made products are known for their quality, beauty, and their durability but lightweight. As the world’s population has increased, so has the need for cotton. This is because every day, cotton-made clothes are worn by more than 6 billion people.

Cotton’s producing industry is highly fragmented. The biggest producers are China, India, United States, Pakistan, and Brazil which produce 33M, 27M, 18B, 10M, and 9M bales of cotton every year. Most of the demand comes from China and other South Asian countries, which are the biggest when it comes to the manufacture of apparel.

The increased population and the global growth has led to more demand for cotton. This is simply because more people mean more demand for clothes. As shown below, the price of cotton rose from a low of $66 in mid-2017 to a high of $96 cents in June this year. This happened as other agricultural commodities showed some weaknesses.

After reaching the high of $96 cents, the price of cotton has dropped and is currently at $83. The decline in the price is mostly because of the issue of trade. Early this year, the Trump administration announced that it would place tariffs on a collection of imports from China. China on the other hand announced an assortment of retaliatory tariffs on American goods. Traders believe that the disruption of the industry will lead to higher-priced clothes which will in turn lead to lower demand for clothes. Lower demand translates to lower prices. However, for cotton, tariffs might not have major implications to the demand of cotton.

Another reason for the falling price is the latest World Agricultural Supply and Demand Estimates (WASDE) released by the Department of Agriculture. For any agricultural trader, the WASDE report is a handy document that should always be read. In the latest report, the department said that the acreage of cotton in the United States is on an upward trajectory. In 2016/17 season, 10 million acres were planted. This rose to 12.6 million acres in the 2017/18 season. It will rise to 13.52 million acres in the 2018/19 season. Most of the cotton harvested in the US is exported to the Asian countries.

As shown below, the price of cotton has been falling in the past few months. It is now declining with the aim of testing the 80 cents level. The current price is above the 42-day moving average and below the 21-day moving average, with the commodity channel index fading. In the short term, as traders focus on the ongoing issue of trade, the price could continue moving lower. However, in the medium-term, the pair is likely to recover and continue the upward trend.

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Gold Continues to Decline as the Dollar Strength Continues

The use of gold can be traced to the earliest manuscripts ever found. Its use as a prestige commodity and form of exchange is found in all these historic books. In the early 1900s, the world came to what was known the gold standard. During this time, gold was the only recognized means of exchanges. When the first world war started, Germany abandoned gold because it was not in abundance enough to support the purchases of weapons. In 1944, the Bretton Woods agreement came into being at a United Nations meeting. The agreement established the dollar as the world’s reserve currency. All currencies were pegged to the dollar.

In 1970s, under President Richard Nixon, parts of the Bretton Woods agreement was abandoned. This led to the massive surge on the price of gold. The price of gold had its biggest rally in the 70s, rising from $35 in 1970 to $127 in 1973. It continued rising and after the collapse of the Shah regime in Iran, the price reached a high of $850 per ounce.

The role of gold in the marketplace today is different from other metals. Gold has no major industrial use unlike its other peers. For example, silver is used heavily in cutlery manufacture while platinum and palladium are used in the vehicle and machinery manufacture. Gold on the other hand is used in the ornament manufacture and has no other major uses. Most gold that is mined is bought by central banks and other institutional holders for use as an investment instrument.

Gold price is quoted in dollar terms. This means that a rise in the value of the dollar will lead to a decline in the price of gold. Therefore, most traders who are concerned about the valuation of the dollar tends to stay short gold and vice versa. In addition, gold is used as a safe haven commodity with investors rushing to it when risks increase.

In the past few months, the price of gold has been falling and this week, it crossed the important support of $1200 per ounce. This is a sad situation for gold but one that was expected. The Federal Reserve has sounded very hawkish in the past few months, promising two more hikes this year. As the yield of the dollar increases, and considering that gold does not have a yield, the value of gold tends to fall.

The decline in gold prices may continue to increase as the Fed continues to tighten and if the central banks in the UK, Japan, and EU continues with the easing regime.

This comes at a difficult period for gold miners. Since gold is found deep inside the earth’s crust, it becomes very difficult and expensive for the mining companies. In South Africa, mining companies have announced plans to shut down mines and fire tens of thousands of people. The same trend is continuing in other countries like Australia, Russia, and Indonesia.

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South African Rand Collapse Continues as Hopes on New President Fade

The year started well for the South African rand as traders placed their hopes with the new administration. As the year ended, the regime of the corrupt leader, Jacob Zuma ended and he was replaced by his deputy, Cyril Ramaphosa. Ramaphosa was a favourite for investors. As an accomplished businessman, they believed that he would initiate reforms to the country.

However, his young government has been faced with mounting problems. The biggest challenge so far is the issue of land reforms. This year, the parliament passed a bill to take white-owned lands and distribute it to the native South Africans. The goal is to do justice to South Africans who feel marginalized by the white people who own large tracts of lands in the country.

Sadly, this model has been tried in another country and failed. In the neighbouring Zimbabwe, the government of Mugabe took the land from white settlers and distributed it to the natives. The result was low productivity and Zimbabwe moved from being a bread basket to one of the poorest countries in the world.

Other than the land issue, the mining sector in South Africa has continued to deteriorate. Already, most firms have announced mine closures and more than 20,000 South African miners are expecting to be fired.

This has led the South African rand to be among the worst performers this year. Its value has fallen by more than 20% and has reached $14.75. While the RSI is at 75, the worst could be expected for the South African rand as the fundamentals decline and as the Fed continues to tighten.

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Week Ahead: Turkey, Trade, and Economic Data

This week, the focus among investors will remain in Turkey. On Friday, the crisis in Turkey led the global markets to have a major decline, with the Dow and the DAX having double digit losses. The crisis started after the US administration announced new sanctions on two Turkish ministers. As the crisis unfolded, Donald Trump announced fresh tariffs on the country, leading to more problems for the Turkish Lira, which fell by more than 15% on Friday. Traders will watch closely the unfolding issues and react to any headline that emerges.
Traders will also focus on the issue of trade. In recent months, headlines on trade have moved markets as traders expect for retaliations between the US and China. Already, the two countries have placed tariffs on each other worth more than $50 billion and the US is in line to add more tariffs worth $200 billion. Last week however, traders became complacent as the trade talk failed to have the impact it had a few months ago. As shown below, the VIX has in recent weeks moved to the lowest levels this year.

Apart from Turkey and trade, traders will this week focus on economic data. Today, OPEC will release its monthly report. This is a report that shows the major developments in the crude oil market. Traders look at it closely because it gives them an indication of the ongoing in the oil market. In today’s report, the issue of Iran sanctions will be watched closely. This is because some sanctions went into effect last week with major ones expected in a few weeks’ time. Crude oil prices are high today as traders wait for the report and wait for the talk on sanctions.

Tomorrow, the focus will turn to China and the EU. China will release the industrial production data. This data will give traders an indication of the impact of the ongoing trade war with the United States. On the surface, the production should decline, which will be a win to Trump. However, the opposite could happen. In recent weeks, Chinese data on exports shows that the country is still doing well. Traders expect the data to show that industrial production rose by 6.3% in July, which will be better than the 6.0% in June. The unemployment rate is expected to remain at 4.8% while fixed asset investments is expected to remain unchanged at 6.0%.
Tomorrow, they will also focus on the Germany GDP growth, UK jobs numbers, and the EU GDP growth for the second quarter. In the second quarter, traders expect the Germany’s GDP to have grown by 2.5% after the slow growth in the first quarter. The EU economy is expected to remain at 2.1%, which is lower than the 4.1% growth rate from the US.

On Wednesday, we will get the UK CPI numbers which will give us an indication of what the BOE will do in the September meeting. Traders expect the CPI to be at 2.5%, which will be higher than the 2.4% in June.

Other data expected this week will be the US retail sales, US building permits, the Australian employment numbers, and the EU CPI numbers.

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Weekly Review: Complacency Returns to Markets Even With the Trade Talk

This week, with little economic data coming through, the biggest news was on trade. Trade has continued to dominate the financial markets as the two biggest economies flex their muscles. On Wednesday, the Chinese government announced fresh tariffs on US imports such as cars and crude oil. The total tariffs announced were worth more than $16 billion and showed that the two countries will continue to battle. Earlier in the week, a representative of the Chinese government said that companies like Apple will likely be used for bargaining purposes. Still, the trade issues did not have major impacts on the financial markets. As shown below, the volatility index continued to decline during the week.

The Reserve Bank of Australia met earlier in the week and announced its interest rates decision. The central bank left interest rates unchanged as was expected. In the statement that followed, the bank’s officials said that there was a likelihood that they would move on interest rates in a near future. They pointed to the growing Australian economy, which has seen falling unemployment rate and increased labour market tightening.

After the RBA, the Reserve Bank of New Zealand (RBNZ) met and left rates unchanged. Their rate decision was expected. What was not expected was the decision to leave rates unchanged until 2020. This pushed the New Zealand dollar down to the lowest level in almost one year as shown below.

The British pound was a major loser this week. The decline started on Monday after the Foreign affairs secretary, Liam Fox sounded a warning about the risks of a no-deal Brexit. He said that there was a 60% chance that there will be a no-deal Brexit. This was less than a week after the Bank of England (BOE) governor sounded a warning, saying that the risk of a no-deal Brexit was uncomfortably high. Last week, the European Union main negotiator rejected parts of the proposals of Theresa May. The two sides have a point to prove. The European Union wants to be tough on the UK to prevent other members from leaving. The UK on the other hand wants a deal that will likely lead to other countries wanting to leave the union.

Another big news was about the US sanctions on Russia. The Trump administration announced fresh tough sanctions on Russia for a poisoning incident in the UK. Russia has denied involvements in the poisoning. The sanctions came two weeks after Trump met with the Russian president, Vladmir Putin in Helsinki for a controversial summit. The new sanctions led to a sharp decline in the Russian ruble.

Finally, CPI numbers were big news this week. Yesterday, data from China showed that the CPI was 2.1%, which was higher than the expected 2.0%. The United States is expected to release their CPI data. The US data is expected to show that the CPI rose by 3.0%.

On Friday, data from Japan showed that the GDP for the second quarter was at 1.9%, which was higher than the expected 1.4%. The United Kingdom is also expected to release the GDP numbers.

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Options For the Turkish Lira as it Falls to an All Time Low

Turkey is an important country in Europe and Asia with a GDP of more than $850 billion. The country has in the past applied to join the European Union in a bid to become more Western. The country is known for its vehicle, machinery, and refined petroleum products. It is also known for its large fashion industry.

In recent months, Turkey has not been at peace. Its economic growth has faltered, inflation has risen to more than 15%, and its currency is now at an all time low after losing 30% of value this year. The latter point is a good way to see what happens when the executive branch of a country takes over the monetary policy decisions.

Still, the Turkish government can help stabilize the currency. First, the government can negotiate with the United States. This week, the Trump administration announced fresh sanctions on the Turkish government for the arrest of an American pastor. These sanctions will have a negative effect on the Turkish economy and its currency.

Second, the central bank can move to raise interest rates. With inflation this high, the only logical intervention by the bank is to hike rates, a move that would go against Erdogan’s pledge. Third, the government can talk with IMF in a similar manner to what Argentina did. With a reluctant central bank, this will be unlikely to happen because the IMF will demand a tightening of the economy.  The final option for the Turkish government is status quo. This is still manageable because the country’s budget deficit is at 2% of the GDP, which is significantly low.

The USD/TRY pair reached 5.7412, which is the highest level ever. The pair is now above all the major moving averages and the RSI is currently overstretched at almost 90. This is an indication that for contrarian and long-term traders, this is an ideal period to look at the Turkish Lira. However, in the short term, the pair could continue to move higher.

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Japan Q2 GDP Grow Faster Than Expected as UK GDP Meets Expectations

Earlier today, the Japanese statistics office released the preliminary numbers for the second quarter GDP. The numbers showed that the economy rose by an annualized rate of 1.9% in the second quarter. This was higher than the expected 1.4% annualized rate and the Q1 contraction of 0.9%. The growth in the GDP in the quarter was mostly because of increased capital expenditure which rose by 1.3%. This was higher than the expected growth of 0.6%. Another reason for the growth was the increase in private consumption, which rose by 0.7% in the quarter, higher than the expected 0.2%.

The growth was hampered by external demand which contracted by minus 0.1%. Traders were expecting it to remain unchanged at 0.1%. This was a reflection of the challenging trade environment. During the quarter, there was a disruption in trade as the US initiated tariffs on steel and aluminium. In addition to the GDP numbers, the country released the PPI numbers which beat analysts’ forecasts. The PPI in July rose by 3.1%, which was higher than the expected 2.9%.

The expansion in the Japanese economy was released a week after the United States released its GDP numbers for the second quarter. The numbers for the United States rose by 4.1%, which was the fastest increase since 2014 and was a reflection of the positive impacts of the tax reform and the spending package released earlier this year. Traders are now waiting for more data to predict whether the economy will continue moving higher in the third quarter.

The Office of National Statistics (ONS) released the first preliminary numbers for the UK GDP. The numbers showed that the economy rose slightly in the second quarter. On an annualized basis, the economy rose by 1.3%, which was expected. In the first quarter, the economy had expanded by 1.3%. On a quarterly basis, the economy rose by 0.4%.

On another positive note, the manufacturing production in June rose by 0.4%, which was higher than the expected 0.3%. It was nonetheless lower than the 0.6% gain in May. On an annual basis, the manufacturing production rose by 1.5%, which was higher than the expected 1.5%. The industrial production too of 1.1% growth was better than the expected 0.7% gain. The trade balance in June of 11.38 billion pounds was better than the expected 12.05 billion pounds and the balance in May of 12.52 billion pounds.

After the data was released, the pound remained lower than the dollar as traders continued to worry about the possibility of a no-Brexit deal. Such a deal will be a game changer for the UK economy whose biggest trading partner is the European Union.

Later today, we will get the CPI data from the United States. Traders expect the CPI to have risen by an annual rate of 3.0% while the core CPI is expected to rise by 1.3%. Still, the EUR/USD pair is lower as traders get concerned about Europe’s exposure to the Turkish Lira.

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Why an Upside is Likely For Silver

Silver is having a bad year. Like other metals, silver has declined by more than 8% this year. It has moved from a YTD high of $17.6 and on Monday, it reached the YTD low of $15.1.

Silver is a different metal than gold. While the two metals are found deep inside the earth’s crust, they have different uses. Gold is used mostly as an investment while silver is used mostly for industrial purposes. It is used in the manufacture of jewellery, mirrors, and kitchen products. The biggest producers of silver are Mexico, Peru, and China.

Silver is often known as gold’s poor cousin. This is because an ounce of silver sells for $15 while the same amount of gold sells for more than $1200. Today, the ratio of gold to silver is 1:81.

This year, silver has been on a decline, which is mostly because of the challenging trade issues. It has also underperformed gold, which is down by 6% this year.

Today, silver has reached $15.45, which is slightly higher than the 50-day EMA and lower than the 100-day EMA. The price is also above a key trendline as shown below. If the price rises, it will likely test the $15.6 level.

There is a likelihood that the price of silver will move higher as gold rises. Last week, the US president attacked the Fed for hiking interest rates. While the Fed will likely ignore the president, there are indications that it will reduce the rate hikes in the coming year. If it does this, the price of gold could move higher as the dollar weakens.

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Australian Dollar Falls After Weak Inflation Data

The Australian dollar fell against the US dollar after the country’s statistics office released the Consumer Price Index (CPI) data for the second quarter. The data showed that the CPI rose by 0.4% in the quarter. This was lower than the expected 0.5%. It was however the same as the quarterly CPI numbers for the first quarter.

On an annual basis, the CPI rose by 2.1%, which was better than the first quarter’s CPI of 1.9%. Traders were however expecting the CPI to rise by 2.2%.

The main contributors to the CPI growth were alcohol and tobacco, clothing and footwear, health, and transport, which rose by 1.6%, 1.3%, 1.9%, and 1.6% respectively.

While the data was not as good as the market was expecting, it was closer to the target of the Reserve Bank of Australia (RBA). The bank has targeted the inflation to rise to 2.0%.

In recent weeks, the Australian data has been encouraging. The economy has continued to add jobs and the unemployment rate has remained stable at about 5.2%. In the past RBA meeting, the officials expressed optimism about the economy but remained concerned about trade and housing prices. On trade, most of Australia’s revenues come from exports. Therefore, if there is a problem on global trade, the economy will be affected. In fact, when the US announced steel and aluminium tariffs, Australia was the first country to protest.

Natural resources are very important to the Australian economy with resources like copper and coal forming an important part of the economy. The prices of these commodities has fallen as the cloud of trade remain.

On housing, the two biggest cities in the country have seen their prices drop. Sydney and Melbourne’s housing problem has persisted as the demand for houses has remained low while the supply is high.

As shown below, the AUD/USD pair has reached 0.7398, which is close to the lowest level since yesterday. In the past few weeks, the pair has traded in a sideways direction after seeing a major drop two weeks ago. This drop came after the RBA officials raised concerns about the issue of trade. Traders interpreted the statement as being dovish. With inflation easing, there is a likelihood that the pair will remain going lower in the foreseeable future.

Meanwhile, in the neighbouring New Zealand, the economic data was not pleasing. In June, the country’s exports dropped to N$4.9 billion. This was lower than the N$5.35 billion exports in May and the N$5.06 billion traders were expecting. Imports on the other hand rose to $5.02 billion, which was higher than the expected $4.92. This led to an increased trade deficit of $113 million. In response to the data, the NZD/USD pair dropped to an intraday low of 0.6785. It has since risen a bit and reached 0.6805.

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Weekly Review: Dollar Surges as FOMC Remains Optimistic About the Economy

This week, the global financial markets continued to stabilize following weeks of increased turmoil. Here are some of the most important updates of the week.

Cryptocurrencies

This week, the cryptocurrencies market started positively. On Tuesday, the currencies reached a weekly high with bitcoin reaching a high of $11,797.

Since then, the currencies started going down with bitcoin reaching its weekly low on Thursday when it reached $9,574.

The downward movements happened as traders took profits following a multi-week rally that started a two weeks ago. Since then, the currencies have risen by more than 50%.

The positive news came from South Korea which moved from threats to embracing the currencies.

Central Banks

This week, we received multiple words from key central bankers. On Tuesday, we received minutes from the Royal Bank of New Zealand’s last meeting. The minutes showed that while the members were optimistic about the economy and the hegemony of the global economy, they remained highly concerned about the ballooning mortgage debt. Week-to-date, the AUD is lower 1.50% against the dollar.

On Wednesday, the BOE held the inflation hearings where the members reaffirmed their past statements about hiking rates if inflation continues to rise. The pound is low by 0.44% against the dollar.

Global Stocks

The global stocks were significantly down this week as traders started questioning the long-term prospects. As of this writing, the Dow and S&P are down 0.94%, 1%, while the DAX and Nikkei were up 1.31% and 1.26% respectively. In the United States, the biggest stocks gainers were Home Depot, Exxon Mobil, and United Health, which gained by 1.32%, 1.30%, and 0.87% respectively.

Currencies

The dollar index was up by 1.41%. The upward momentum for the dollar came as investors forecasted that the Fed was likely to raise interest rates. This came after the Fed released the minutes for their latest FOMC meeting. The minutes showed that the Fed officials were optimistic about the economy, which they believe will be boosted by the tax cuts. Against the Euro, Yen, and Pound, the dollar was up by 0.77%, 0.40%, and 0.31% respectively.

The Canadian dollar continued its multi-month decline, falling to a low of 1.2742. The Australian dollar was also down by 1.50% against the dollar.

Commodities

Gold was up marginally this week. It started the week by reaching a high of $1,349 before losing those gains to currently trade at 1,333. The downward trend came as the dollar strength intensified and as the volatility started to come down. Its poor cousin, silver fell by 0.72% while platinum and palladium fell by 1.51% and 0.35% respectively.

In the crude oil markets, the crude oil continued its upward momentum with the Brent rising by more than 2% and WTI by 1.62%. The upward momentum continued as the EIA data showed reduced stockpiles in the US. The data showed that stockpiles fell by 1.6 million barrels to reach 420.8 million barrels. The data showed that oil production was unchanged to 10.2 million barrels per day.

In the coming week, traders will focus on manufacturing data from China, employment data from Germany, inflation data from European Union, US GDP growth, and manufacturing data from the US.

Sources:

https://www.wsj.com/news/types/central-banks

http://markets.businessinsider.com/indices

https://www.bloomberg.com/markets/stocks

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