While the Eurozone problems have been well documented, recently there are signs of a weakening economy in China, and Australia is the major commodity supplier to China. Any weakness in China will hurt the Aussie and, opposed to the Eurozone problems, these are not cooked already into the price. This creates a major opportunity for the rest of this year in going long the EUR/AUD. There are two entry points to consider. First, we can put on a small long position right now, which wouldn’t be unreasonable. Or we can wait until confirmation of a trend change. Once this pair turns, there is the potential for a huge move.
The second example is the USD/MXN. In regard to the Mexican peso, we have an interesting play on politics and economics. The U.S. dollar has had a major decline against the Mexican peso since May of 2008 when it was just over 0.100. Today it is 0.075. About 80% of Mexico’s exports are with the United States and, in a sense, expecting a rise in the peso is a way of betting on a U.S. recovery. Additionally, the Eurozone sovereign debt crisis is very bearish for the peso. More recently, it appears that the peso has shaken off the Eurozone influence and has diverged from this bearish co-movement (see “Decoupling”). With new Mexican President Enrique Pena Nieto the Mexican peso may strengthen even further if his drug-war policies gain momentum, or at least expectations turn more positive in Mexico.
Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics.” He is editor of “Fear and Greed Trader” at Agora Financial and can be reached at firstname.lastname@example.org.