MexECON Blog

Peso Review - August 2010

In August, the Mexican peso fell 3.9% against the U.S. dollar, closing the month at a spot-market value of $0.0758 (13.19 per dollar).  At the end of July, the peso had traded at $0.0789 (12.67 per dollar).  The currency was on a downtrend virtually all of August, except for a brief rally at mid-month.  The decline mirrored the performance in many other risky assets, as investors focused on data pointing toward weaker economic growth in the United States and growing risks of a double-dip recession.  Reflecting those and other problems over the last several months, the peso at the end of August was down 8.0% from its most recent intraday peak of $0.0824 (12.14 per dollar) on April 25. 

Comment:  Fundamentals for the peso have turned increasingly negative.  The main problem is the threat of further slowing in the U.S. economy, which is Mexico's main export market.  Even without that threat, Mexico's trade balance has recently returned to consistent deficits, as its imports begin to rise even faster than its exports.  Finally, lingering concerns about sovereign debt defaults in Europe continue to weigh on the peso and other emerging-market currencies, in spite of recent data showing that Mexico's budget deficit and debt levels remain low.  Technical indicators are also flashing warnings.  The peso has now fallen well below both its 20-day and 50-day moving averages.  In addition, the currency has shown a long series of lower lows, and it has now broken below a key support level at approximately $0.0760 (13.16 per dollar).  Perhaps most important, the peso began its most recent down-leg by breaking below the neckline of a triple-top formation that had formed in early August.  Momentum indicators provide some hope because they suggest the currency is rapidly becoming oversold.  Nevertheless, the near-term outlook for the peso remains negative as long as U.S. economic indicators are weak.

Patrick Fearon, CFA
Vice President, Fund Management

                                            U.S. Dollars Per Peso
Peso 1008

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