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