With the first half of 2012 over, it’s a good time to spot opportunities that we may have missed in specific currency pairs. With the currency markets naturally being dominated by headlines (the Eurozone sovereign debt crises and Chinese economic prospects), the tendency to be focused on the near-term is an understandable myopia.
However, a scan of monthly patterns in the currency pairs gives us a big-picture vantage point. It also provides insights into powerful multi-year underlying forces that don’t fade away on headlines. The monthly patterns filter out the noise of weekly and daily trading. There are two compelling technical patterns involving the euro. This is not an accident as the chaos in Europe cascades throughout global markets; Europe is a major contributor to world GDP and other regions react to European economic expectations.
Once you gain some distance from the time lines of intraday trading and map the higher level patterns in the currency markets, you can see some new trading opportunities.
The first example is the EUR/AUD. By pitting the euro against the Aussie we have two underlying markets very sensitive to global growth concerns. It also is a currency pair at an extreme level, which will be hard to maintain (see “Uncharted territory”). The Aussie has begun to weaken this year after a very strong uptrend. The euro also has strong bearish headwinds as the sovereign debt issues of several members still have not been resolved.
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.