MexECON Blog

Peso Review - April 2011

In April, the Mexican peso rose 3.8% against the U.S. dollar, closing the month at a spot-market value of $0.0869 (11.51 per dollar).  That marked the fifth straight monthly gain for the peso, after increases of 1.7% in March, 0.2% in February, 2.0% in January, and 0.4% in December.  The peso rose relentlessly in April, except for two short-lived pullbacks in mid-month.  The peso is now trading at its strongest level since late 2008.

Comment:  The "super peso," as the currency is often described in the Mexican press, continues to rise on the back of positive fundamentals.  Mexican exports continue to boom, and the country's trade balance is healthier than it has been in more than 15 years.  In addition, Mexican interest rates remain relatively high, and the government has continued to keep its fiscal position in order, in contrast to the gaping deficits and debt problems in much of the developed world.  Finally, key central banks in the developed world continue to keep their monetary policy loose, unleashing waves of liquidity across the world's financial markets.  Because some large countries in Asia and Latin America are clamping down on capital inflows, Mexico is getting more than its fair share of the resulting capital flows.

Looking forward, the positive fundamentals described above are likely to continue for a bit longer, but the European Central Bank's recent interest rate hike and the U.S. Federal Reserve's commitment to stop buying bonds in June should raise a yellow flag.  Moreover, the peso's extraordinary performance over the last several months has left it quite highly valued, and momentum indicators suggest it is overbought.  Since currencies have a tendency to keep trending, the most likely scenario is for the peso to rise a bit further.  However, the currency is becoming increasingly vulnerable to at least a significant stall and possibly is painful correction.

Patrick Fearon, CFA
Vice President, Fund Management

                                          U.S. Dollars per Peso
Peso 1104

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