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
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
Patrick Fearon, CFA
Vice President, Fund Management
U.S. Dollars Per Peso