MexECON Blog

Peso Review - February 2011

In February, the Mexican peso was very little changed against the U.S. dollar, rising just 0.2% and closing the month at a spot-market value of $0.0826 (12.11 per dollar).  That marked the third straight monthly gain for the peso, after increases of 2.0% in January and 0.4% in December.  Despite the small rise in February, however, the peso actually was weakening through most of the month.  The currency surged at the very beginning of February, but it gradually weakened after that in response to news of increasing political unrest in the Middle East.

Comment:  There is still significant upward pressure on the peso, primarily stemming from Mexico's booming exports, relatively high interest rates, attractive fiscal stance, and loose monetary policy in the developed world that has pumped up global liquidity.  In addition, many countries in Asia and Latin America have been limiting capital inflows in order to stem the upward pressure on their own currencies and reduce inflationary pressure.  That has made Mexico more attractive as a place for international investors to seek higher returns.  Nevertheless, the peso has retreated in recent weeks because of concerns that the recent political unrest in Egypt and Libya will boost oil prices, slow world growth, and short-circuit the rise in the Mexican currency.

Looking forward, the positive fundamentals discussed above are likely to continue putting upward pressure on the peso going forward.  In addition, technical factors appear conducive to the peso rising further.  Momentum indicators no longer indicate that the currency is overbought, and the currency has shown some buoyancy around its 50-day moving average.  Nevertheless, the further increases in the peso could be delayed if Middle Eastern unrest continues or worsens.

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1102

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