MexECON Blog

Peso Review - March 2010

In March, the peso strengthened against the U.S. dollar by 3.3%, rising to $0.08076 (12.38 per dollar).  The currency's value was just $0.07819 (12.79 per dollar) at the end of February.  As shown in the three-month chart below, the peso started the month strongly.  However, it pulled back modestly during the third and fourth weeks of March, as negative news on Greece and other euro-zone economies led to renewed risk aversion in the world's financial markets.  The pullback proved short-lived, and as the markets regained their composure at the end of the month, the peso started climbing again.  The peso has now risen more than 25% from its mid-recession low in early March 2009.  It is now at its strongest level since October 2008.

Comment:  Mexico's economy continues to rebound, putting upward pressure on the peso.  The U.S. economy continues to recover, spurring increased demand for Mexican goods and an improved Mexican trade balance.  In turn, increased industrial activity is bringing down Mexico's unemployment rate.  These positive trends are helping to offset continued problems, such as low investment and a crippling credit crunch in Mexico's domestic market, and the brightening outlook has helped spur healthy gains in the Mexican stock market.  Since the peso often rises on an improvement in the relative size of the Mexican trade balance versus the U.S. trade balance, and on gains in the Mexican stock market, these fundamentals suggest the peso could continue to rise in the near term.  Technical signals also look encouraging.  As shown in the chart, the currency was able to bounce off its 20-day moving average in late March, and broke above a resistance level of approximately $0.08030 (12.45 per dollar) in the last days of the month.  The main caveat is that momentum indicators suggest the peso has been over-bought.  That would suggest the currency is vulnerable to a short-term correction at some point.

Patrick Fearon, CFA
Vice President, Fund Management

                                                           U.S. Dollars per Peso
Peso 1003

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