ETF in Focus: Mexican Peso

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau for ETF Digest

NEW YORK (ETF Digest) -- Personally, I own physical silver for the preservation of wealth because I strongly believe in the long-term downside fundamentals of the U.S. dollar. I also own silver mining companies as a wealth generator since I strongly believe in the long-term fundamentals for silver as well. Another common way to protect assets from dollar destruction is to diversify into other hard assets, the corporations that produce them, or the currencies of commodity exporting countries.

I have been tracking the Mexican peso very closely because Mexico is the world's largest producer of silver. In full disclosure I do not have any position in the Mexican peso at this time. Let's take a look at some key developments on the weekly chart of the Mexican Peso ETF (FXM), as of Friday, Sept. 16, 2011 close, and compare it to what the Commercial Hedgers have been doing in the Mexican Peso Futures by looking at a few of the Commitments of Traders Reports at key points.

Back on the week of April 25, 2011 when the peso was making new 52-week highs, the Commercials were net short the peso 138,648 contracts as of the April 26, 2011 COT report. When the peso was trying to make another push to new highs during the week of July 4, 2011, the Commercials were net short 89,047 contracts on the July 5, 2011 COT report.

At first glance this might appear to be bullish, since the Commercials were not increasing their net short position. But looking at the Open Interest and not just the increase or decrease in the commercials net position tells the same story. On the COT report for April 26, when the peso made new highs the Open Interest was 170,977 contracts. In the July 5 report the Open Interest was 125,229 contracts. On a relative basis it was apparent that the Commercials were still of the strong belief that the peso was overvalued near these highs.

On Aug. 4, 2011, the peso was breaking down below the low point in the valley where I drew a dashed trendline on the weekly chart, in what resembled a "Double Top" formation in technical analysis. Using "Swing Rule" the initial target for the potential move was the distance or length between the low point of the valley to the top of the formation, and that was nailed pretty quickly; in fact the gains were approximately 3x the initial target.

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