MexECON Blog

Peso Review - November 2010

In November, the Mexican peso fell 1.1% against the U.S. dollar, closing the month at a spot-market value of $0.0801 (12.48 per dollar).  After two straight months of gains in September and October, the peso's momentum carried it upward for the first few days of November, allowing it to reach an intraday high of $0.0821 (12.18 per dollar).  Then, however, a range of fundamental and technical factors began to weigh on the currency, as predicted in our Peso Review last month.  The peso fell throughout the last three weeks of November, in spite of a rally attempt at mid-month.  The currency's close at the end of November was its weakest since mid-October.  Nevertheless, the currency is still up 6.2% from its most recent intraday low of $0.0754 (13.26 per dollar) on August 30.

Comment:  Despite its pullback in November, the peso is still benefitting from expectations about new liquidity from the U.S. Federal Reserve's plan to start purchasing bonds again.  In addition, Mexican exports continue to grow well, the country's economy continues to rebound smartly, and Banco de México's benchmark interest rate is still well above the rates in most developed countries.  Nevertheless, the peso suffered in November from renewed concerns about sovereign debt defaults, especially as Ireland was forced to accept a large bailout from the European Union.  The travails in Europe have prompted global investors to abandon all kinds of assets that they perceive to be less than the very highest quality, and the peso has been among the abandoned assets, in spite of Mexico's healthy finances.  In technical terms, the peso also had become quite overbought by early November.

Looking forward, market sentiment in recent days has appeared to improve.  Global investors are worried about weak finances in Portugal, Spain, and Italy, but incoming economic data from several countries has been strong recently, which may help allay sovereign debt fears and prompt renewed interest in risk assets.  In Mexico, the pace of economic recovery has slowed somewhat, and some journalists and policymakers have even begun discussing the possibility of renewed interest rate cuts.  Even if Mexico's economy moderates and interest rates are cut somewhat, however, Mexican rates would still be relatively high.  Finally, momentum indicators suggest the peso is now oversold.  Selling volumes have decreased, and the currency seems unable to break below its current support level.  In sum, fundamental and technical factors suggest the peso could rebound in the near term.

Patrick Fearon, CFA
Vice President, Fund Management

                                          U.S. Dollars Per Peso
Peso 1011

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