MexECON Blog

Peso Review - September 2011

In September, the Mexican peso dropped 11.3% against the U.S. dollar, closing the month at a spot-market value of $0.0719 (13.91 per dollar).  The decline was the fourth in the last five months, and it was even worse than the 5.1% fall in August.  In fact, the currency's pullback in September was the steepest since the depths of the global financial crisis in October 2008.  The peso has now dropped a massive 17.3% since it most recent peak back in April, and it has lost almost all of the ground it recovered since the financial crisis.  The peso is now at its lowest level since mid-2009.

Comment:  Last month, this blog opined that the policy challenges in the developed countries and the continuing slowdown in global economic activity were already fully priced into the financial markets.  Obviously, that assessment was incorrect.  With economic prospects questionable, investors around the world are still abandoning risk assets, and emerging market currencies of all types are taking a beating.  The fact that Mexico's incoming economic data is still showing growth could even be one reason for the peso's bid declines.  Mexico's economic indicators are vulnerable to dramatic softening in the coming months as the global slowdown starts to have a greater impact, and the decline in the peso may just be reflecting that fact.

Continuing evidence of economic slowing and continued policy paralysis in the major developed countries could well point to further declines in the peso.  Moreover, as Mexico gears up for elections in 2012, political risk will become a bigger factor, making it even harder for the peso to recover.  The only thing going for the peso right now is that technical indicators suggest the currency is already deeply oversold.  It is also coming closer to its financial-crisis low of approximately $0.065 (15.39 per dollar) in early 2009.  That low is likely to be an important support level for the peso.

Patrick Fearon, CFA
Vice President, Fund Management

                                          U.S. Dollars Per Peso
Peso 1109

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