MexECON Blog

Peso Review - May 2011

In May, the Mexican peso fell 0.6% against the U.S. dollar, closing the month at a spot-market value of $0.0864 (11.57 per dollar).  That marked the first decline in the currency since last November.  As this blog forewarned at the beginning of May, the peso fell sharply through mid-month, when it reached an intraday low of $0.0848 (11.79 per dollar).  It then began a modest recovery through the end of May.

Comment:  As discussed on this blog last month, the peso had become overbought and was set for a correction, so the decline in May was no surprise.  The only real surprises were that the fall in the currency was so modest and that the currency already appears to be rebounding.  That probably reflects the continuing strong fundamentals for the peso.  Mexican exports continue to rise at a good pace, despite signs of moderating growth in the latest data.  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 imposing strict capital controls, Mexico is getting more than its fair share of the resulting fund flows.

Looking forward, the positive fundamentals described above are likely to continue for a bit longer, but recent developments raise a yellow flag.  Global inventory rebuilding has apparently been completed, rising debt has forced many governments to start ratcheting back on spending, and higher commodity prices have prompted some central banks to raise interest rates.  In many key developed countries, excess housing supplies and financial systems burdened by bad debts mean that investment is not playing its traditional role as a supercharger for their economic recovery.  In a word, the world economic rebound appears to be on the cusp of a soft spot that could make investors more risk averse and lessen the appeal of currencies like the peso.  Moreover, even with the currency's decline in May, the peso does not yet appear to be attractively valued from a technical standpoint, and it appears to be hitting resistance at its current level.  The currency could therefore be in for a period of directionless trade or relatively subdued appreciation for the time being.

Patrick Fearon, CFA
Vice President, Fund Management

                                            U.S. Dollars per Peso
Peso 1105

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