MexECON Blog

Peso Review - October 2011

In October, the Mexican peso rose 4.0% against the U.S. dollar, closing the month at a spot-market value of $0.0748 (13.37 per dollar).  However, the rise in October reversed only part of the 11.3% plunge in September and the 5.1% decline in August.  Moreover, the peso's rise in October was only its second in the last six months.  The currency rose strongly early in the month before hitting a plateau and later retreating.  It then rallied strongly through the end of the month.

Comment:  The peso's rise in October reflects the general stabilization of sentiment in the world's financial markets last month after a disastrous September.  In October, various economic data across the globe came in better than expected and seemed to provide reassurance that the precipitous slowdown during the summer might not necessarily lead to a new recession.  In addition, leaders from the European Union (EU) developed yet another plan to deal with the Continent's debt crisis.  The new plan appears to have more firepower than the previous plans, though there are still questions about whether it will be effective or even fully implemented.  With the environment looking more benign, investors tip-toed back into a range of risk assets as October progressed.

Looking ahead, Mexico's relatively good economic growth, healthy fiscal and monetary policy, and high interest rates have the potential to again provide support to the peso.  However, it is well understood that the country's economic health depends in large part on U.S. performance.  If the United States and other developed economies start to weaken further again, the peso would likely come under renewed downward pressure.  The currency would also likely suffer if there is more bad news out of Europe, such as yesterday's surprise announcement that Greece would hold a referendum on the latest EU bailout. Unfortunately, technical indicators do not currently point in a clear direction.  At the end of September, technical indicators suggested the peso was deeply oversold, which this blog pointed out was a potential source of recovery in October.  Now that the currency has partially recovered, however, technical indicators look neutral.  The currency's closest support level is at approximately $0.0730 (13.70 per dollar).  Its next resistance level is at approximately $0.0755 (13.25 per dollar), with another resistance level at approximately $0.0770 (13.00 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                               U.S. Dollars Per Peso
                                        Source:  Trading
Peso 1110

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