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What to Pair Against the Weak Australian Dollar

Spike Mafford | Photodisc | Getty Images

The Australian currency has been falling sharply and selling Aussie dollars for the appreciating Mexican peso is becoming an increasingly popular trade, said one analyst.

"We think the Mexican peso will probably appreciate around 6 to 7 percent against the Aussie dollar over the next 12 months," Hamish Pepper, a forex strategist at Barclays, told CNBC. "This kind of trade makes a lot of sense to us."


Pepper explained that the trade pair works because the Australian and Mexican economies have different exposures.

"Mexico is heavily leveraged into the U.S. economy, which we think will recover in the second half of this year quite strongly," he said.

The U.S. economy expanded at a 2.5 percent annual rate in the first quarter and the equity markets have been on a roll so far this year: the Dow Jones industrial average has gained almost 18 percent and the S&P 500 has risen more than 17 percent.


While Mexico's economy is strongly tied to the U.S., Australia is highly dependent on the commodity trade with its Asian neighbors.

"In contrast, if we look at trading partners, Australia is heavily exposed to China and we're continuing to see mixed data at best out of that region," Pepper said.

Even though Chinese growth is much faster than expansion in developed economies, the first-quarter data came in lower than expected at 7.7 percent, down from 7.9 percent in the previous quarter. And Chinese equities have taken a breather—the MSCI China Index has lost 2.23 percent over the past three months.

Weakening China growth and recent Australian rate cuts have taken the air out of the Aussie dollar. The currency lost around 7 percent against the U.S. dollar in just over a month. And some analysts expect the Australian dollar to fall even further.

(Read More: Goldman Warns of Big Move in Australian Dollar)

On the other hand, there is brighter news coming out of Mexico as the new president is moving boldly with his reform agenda, which has improved sentiment.

"It looks like there is a good chance that the [reforms in Mexico] will be implemented by the current government. That government has good political momentum," Pepper said.

Barclays forecasts that potential growth in Mexico could increase from 4 percent to 6 percent as reforms take hold, leading to additional peso appreciation. But reaching that potential may be some time off. The Mexican government on Friday lowered its growth estimate for 2013 to 3.1 percent from 3.5 percent after sluggish first-quarter growth.

The Mexican peso has strengthened more than 8 percent against the U.S. dollar so far this year, wrote Alfredo Coutino, a director at Moody's Analytics, in a note. But he does not see Mexican authorities taking action at the moment as "they consider that the peso is still undervalued with respect to the pre-crisis level of 2008."

(Read More: What's Wrong With This Forex Picture?)

The peso, however, could reach levels that hurt the country's competitiveness by making exports too expensive, he continued.

"Before that point, policymakers will remain passive and the peso will continue to strengthen," Coutino wrote.

Pepper said that there is another currency pair that can serve investors well—the Aussie against the Canadian dollar. Like Mexico, Canada is exposed to the U.S. economy—75 percent of Canadian exports go south of the border.

He expects the loonie to be "the currency that is likely to outperform in the commodity sector."

_By CNBC's Anna Andrianova. Follow her on Twitter @AndrianovaAnna.

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