In January, the Mexican peso rose 2.0% against the U.S. dollar,
closing the month at a spot-market value of $0.0824 (12.14 per
dollar). It was the second straight monthly gain for the
peso, after an increase of 0.4% in December. In fact, through
much of the month, the currency was skyrocketing upward, reaching
an intraday high of $0.0837 (11.95 per dollar) on January 18.
After that point, the peso was treading water for more than a week
before finally dropping sharply in the midst of media reports of
political turbulence in Africa, including massive protests in
Egypt. Despite its pullback at month's end, however, the peso
at the end of January was still up 9.3% from its most recent
intraday low of $0.0754 (13.26 per dollar) last August 30.
Comment: As predicted by this
blog last month, the peso has been gathering significant upward
momentum. In part, the upward pressure reflects Mexico's
booming exports, healthy fiscal policy, and relatively high
interest rates. Those factors alone would have been enough to
draw funds into the peso, but in addition, loose monetary policy in
the developed countries has pumped up global liquidity, and that
liquidity is now flooding into Mexico. Excess funds have also
been channeled into many other countries in Asia and Latin America,
but governments in Korea, Brazil, and elsewhere have imposed
capital controls to limit the inflow. Encouraged by the
Mexican government's commitment to free trade and free finance,
international investors have therefore focused more on Mexico than
they otherwise would have.
Looking forward, Mexico's strong fundamentals are likely to keep
attracting capital and driving up the peso. Indeed, as the
markets became more comfortable with the situation in Egypt at the
beginning of February, the peso was already taking off again.
In addition, Mexican officials have recently discounted the
possibility of any move to impose their own capital controls.
For example, the chief of the economic planning agency within
Mexico's Ministry of Economy was quoted in the press today as
saying that the government had no reason to intervene in the
currency market because the peso is still significantly weaker than
it was before the recession. Economy Minister Ernesto Cordero
also recently said that the strong peso would not necessarily
outweigh Mexico's strong economic advantages, such as its proximity
to the recovering U.S. economy. With Mexico keeping its
economy healthy and its doors open to foreign capital, and with
technical indicators suggesting that the peso is less overbought
than it had been in mid-January, the currency looks set to keep
rising for a while yet.
Patrick Fearon, CFA
Vice President, Fund Management
U.S. Dollars Per Peso