China to Keep Commodities Racing in the Year of the Rabbit?

The year of the rabbit has officially begun in China. But will the fast-growing Chinese economy continue to fuel the commodity trade in the New Year?

That’s a question "Fast Money" traders were asking Thursday morning as revelers in China rang in their new calendar year and the dollar index climbed ahead of Federal Reserve Chairman Ben Bernanke's scheduled press conference at 12:30. Bernanke is expected to defend the Fed’s monetary easing policies, which have been blamed by some — lauded by others — for fueling commodity prices.

“The dollar rising should put the commodities trade in a little bit of a vulnerable position,” said Joe Terranova, Virtus Investment Partners’ Chief Market Strategist.

Commodity futures were mostly lower Thursday, with the notable exception of cotton. The clothing staple was up 2% mid-day after hitting a record early this morning. Cotton has risen 156% in the past year on shortage fears and strong demand from China. Cotton mills in Asia have reportedly rushed into the futures markets in recent weeks on concerns that floods in Australia and Pakistan have destroyed crops.

In fact, demand for cotton is so strong that futures traded limit up Tuesday, prompting the Intercontinental Exchange to propose position restrictions. The ICE wants to put a limit on speculative trading in the fiber.

Such an action could clamp down on the commodities trade, cautioned Kanundrum Capital’s Brian Kelly. “The ICE is talking about position limits on cotton since it is limit up again,” said Kelly. “Could that halt the commodity rise?"

The European Commission is also debating position limits. The EC released a statement yesterday cautioning that limits to control 'excessive speculation' in commodities could be warranted if food prices continue to climb.

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