MexECON Blog

Peso Review - December 2010

In December, the Mexican peso was little changed against the U.S. dollar, rising just 0.4% to close the month at a spot-market value of $0.0808 (12.38 per dollar).  Like many key markets in December, the market for the peso was much less volatile than in the recent past, especially in the last two weeks of the month.  The peso's lowest value during the month was $0.0798 (12.53 per dollar), while its highest value was $0.0813 (12.30 per dollar), both in the first week of December.  The peso's relatively flat performance in December followed a 1.1% decline in November and a 1.6% rise in October.  The peso ended the year up 7.2% from its most recent intraday low of $0.0754 (13.26 per dollar) on August 30.

Comment:  As much as anything, the peso's relatively flat performance in December reflects contradictory sentiment in the currency markets.  On the one hand, the peso is probably benefiting from the U.S. Federal Reserve's renewed security purchases, which are pumping money into the U.S. economy.  Some of the increased liquidity is likely being funneled into riskier assets such as the peso.  Another positive factor is that Mexico's economy continues to grow well, in large part because of rising exports.  Finally, Mexican interest rates remain high relative to those in most developed countries.  On the other hand, investors are still concerned about near-constant news of slow growth and excessive debt in Europe, even as excessive growth in China has forced that country's government to tighten monetary and fiscal policy.  With little clarity on the U.S. economy's future trajectory, these forces continue to counterbalance each other.

Looking forward, fundamental and technical factors suggest that when the peso breaks out of its current trading range, it could well break to the upside.  Improved employment figures and higher retail sales in the United States may be a sign that the U.S. economic recovery will soon strengthen, especially now that tax cuts will start showing up in U.S. workers' paychecks in January.  Stronger U.S. demand would likely prolong the good growth in Mexico's exports and forestall any need to cut Mexican interest rates.  As long as European debt concerns do not explode again, and as long as China does not step on the economic brakes too hard, these developments should keep investors funneling money into the peso.  Although momentum indicators for the peso are currently neutral, other technical indicators are more favorable for the currency.  There is a strong support level under the peso at approximately $0.0800 (12.50 per dollar).  If the peso breaks decisively above its current level around the 20-day and 50-day moving averages, it faces what appears to be only modest resistance points at $0.0813 (12.30 per dollar) and $0.0815 (12.27 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                       U.S. Dollars Per Peso
                                 Source:  TradingCharts.com
Peso 1012

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