MexECON Blog

Peso Review - October 2010

In October, the Mexican peso rose 1.6% against the U.S. dollar, closing the month at a spot-market value of $0.0810 (12.35 per dollar).  The currency appeared to lose some steam in October after its strong 3.8% rise in September, and trading was relatively choppy.  Nevertheless, the peso ended October up 7.4% from its most recent intraday low of $0.0754 (13.26 per dollar) on August 30.

Comment:  The peso's rise in October came as fundamental factors overwhelmed technical indicators pointing to resistance or even a pullback.  The most important fundamental factor was signaling that the U.S. Federal Reserve would again start purchasing bonds in an effort to stimulate the U.S. economy - a move tantamount to printing dollars.  Because interest rates in Mexico are still high relative to rates in most developed countries, and because of incoming data showing the Mexican economy continues to rebound strongly, many of the new dollars would be expected to flow into Mexican assets, resulting in increased demand for the peso.  In addition, there appeared to be some additional buying of Mexican assets in response to Mexican bonds being included in the World Government Bond Index (WGBI) at the beginning of October.

If the Fed follows through with new bond purchases, the peso is likely to rise further.  The peso could get additional upward momentum if Mexican economic data continue to look healthy.  However, technical indicators suggest any near-term strengthening could be modest, and the currency is vulnerable to an outright correction.  One negative indicator is a narrowing between the peso's 20-day moving average and its 50-day moving average.  Also, the peso's recent closing prices have been only slightly above the 20-day moving average, and they could easily slip below that key indicator in the near term.  There appears to be a resistance level at approximately $0.810 (12.35 per dollar).  Even if the peso pushes above that level, the next major resistance would likely come at $0.0824 (12.14 per dollar), the currency's last major high on April 24.  A pullback in the peso would be likely if it fails to push above either of these levels.  A more significant correction would be a distinct possibility if the peso drops below its near-term support level of $0.0800 (12.50 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                             U.S. Dollars Per Peso
Peso 1010

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