Many of you know that there are a number of dependable commodity-related ETF pairs that remain cointegrated ever since I mentioned them in 2006: IGE-EWC, IGE-EEM, IGE-EWA, EWA-EWC, etc. (Their latest zScores are available here to my book's readers and to Premium Content subscribers.) A recent visit to a client in South Africa prompted me to add a new one: EWA-EZA.
It is worth noting that for those country ETF pairs that cointegrate, their underlying currency cross-rates are often stationary as well. Now, there are several advantages in trading currency cross rates instead of ETF pairs. When trading a stationary cross rate, you can enter a limit order to enter and exit, but trading pairs of ETF's involve market orders on at least one side. Also, ETF's can sometimes be hard-to-borrow, and their margin requirements are much more onerous than that of currencies. However, the one major disadvantage in trading cross rates is that they are not always available on your brokerage. For example, based on the cointegration of EWA and EZA you would think that trading AUDZAR would be quite profitable. And you would be right, theoretically, except that AUDZAR is not available for trading on Interactive Brokers. If you know of a good Forex brokerage that have many emerging markets cross-rates for trading, especially those of Latin American countries, please let the rest of us know!