Cotton Club: Be Careful With the Cotton ETN

The iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSEArca: BAL) is higher by nearly 14% over the past 90 days, but cotton is one of the more volatile commodities on the market and investors should exercise caution if they are expecting BAL’s recent bullishness to continue.

BAL was somewhat sturdy last year as other commodities ETFs tumbled in the face of record cotton harvests and a rising dollar. Harvests are expected to exceed demand for the fifth straight year as subdued global growth weighs on consumption. The International Monetary Fund downwardly revised global growth to 3.4% from 3.7% in April, the Wall Street Journal reports. Cotton prices are sensitive to economic data since demand is tied to consumer spending on basic items like apparel, bed sheets and towels.

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BAL, like other commodities products, is benefiting from the slumping U.S. dollar. However, some believe the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is poised to rebound. That could make commodities ETFs of all varieties vulnerable to some downside.


Cotton futures have joined the recent rally in many commodity prices, with the lead month July futures trading near the upper boundary of the recent trading range. However, a look at the current market fundamentals may put into question whether the rally is sustainable,” according to OptionsExpress. “When discussing the Cotton market, one must always look towards China, which is the largest producer and consumer of the fiber. Traders likely will be paying close attention to the Chinese government’s auction of the nation’s strategic Cotton reserves.  So far it has been estimated that China has sold about 2 million bales from its reserves, but still controls nearly half of the global supplies.”

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