MexECON Blog

Peso Review - January 2011

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
                                                     Source:  TradingCharts.com
Peso 1101

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