MexECON Blog

Peso Review - September 2010

In September, the Mexican peso rose 3.8% against the U.S. dollar, closing out the month at a spot-market value of $0.0794 (12.59 per dollar).  At the end of August, the currency had traded at $0.0765 (13.07 per dollar).  The peso rose steadily and strongly throughout virtually all of September, except for a short-lived pullback in the first week of the month and two days of declines at month's end.  As has been the case recently, the peso moved in lockstep with the value of many other risky assets.  As global investors regained their nerve in September, they drove up not only the peso, but also stocks and other more volatile assets.  Nevertheless, the peso at the end of September was still down 3.6% from its most recent intraday high of $0.0824 (12.14 per dollar) on April 25.

Comment:  The peso's rebound in September can be traced to both fundamental and technical factors.  During September, incoming economic reports showed the Mexican trade deficit narrowing again, while industrial production posted a good increase and unemployment continued to fall.  Banco de México continued to hold its benchmark interest rate at historically low levels, but Mexican rates were still relatively high compared with most developed countries.  Just as important, an announcement that Mexican bonds would be included in the World Government Bond Index (WTBI) as of October 1 prompted many institutional investors charged with matching that index to roll into Mexican debt, thereby boosting the currency.  Since the peso was oversold at the beginning of September, these positive factors gave the currency a strong upward bias.

Looking forward, the same fundamental and technical factors that drove the peso upward in September look set to reverse, and the currency looks vulnerable to a pullback, especially if investors once again become more risk averse.  One concern is that the Mexican economic rebound is uncomfortably dependent on rising exports of trucks, autos, and auto parts to the United States.  Therefore, the rebound could moderate in response to slowing U.S. inventory investment and continued tepid demand from U.S. businesses and consumers.  Upcoming economic data could easily come in weaker than in the recent past.  In addition, the WTBI-inspired roll into peso investments has probably been completed, which would help explain the pullback in the peso at the end of September.  Finally, from a technical perspective, it is notable that the peso has not been able to rise decisively above its current resistance levels at approximately $0.080 (12.50 per dollar).  In fact, momentum indicators suggest the currency is overbought.  In sum, the peso could well continue to rise if investors continue to re-embrace risk assets, but against the current fundamental and technical background, the currency looks vulnerable to at least a short-term retreat, and continued substantial gains from here may be hard to pull off.

Patrick Fearon, CFA
Vice President, Fund Management

                                                         U.S. Dollars Per Peso
Peso 1009

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