MexECON Blog

Peso Review - August 2011

In August, the Mexican peso dropped 5.1% against the U.S. dollar, closing the month at a spot-market value of $0.0811 (12.33 per dollar).  The decline was the third in the last four months, and it was the steepest drop since the depths of the global financial crisis in October 2008.  The peso was extremely volatile in the first third of the month, reaching an intraday low of $0.0783 (12.77 per dollar) on August 9.  The currency then stabilized modestly above that level, but at this point, it is still trading at its lowest level since late 2010.

Comment:  Since the beginning of summer, the peso has moved almost entirely in response to sentiment in the broader global financial market.  In the United States and Europe, politicians have proved themselves unable to adequately address the twin problems of excessive government debt and slow economic growth, even as incoming data from around the world showed the global economic recovery entering a potentially long-lasting soft spot that raises the risk of renewed recession.  Investor confidence has fallen sharply, and the peso has been pulled dramatically lower.  The decline in the peso has come in spite of recent data showing Mexican economic growth still has some momentum, and fiscal and monetary conditions in Mexico remain relatively healthy.

Policy challenges in the developed countries and the continuing slowdown in global economic activity now appear to be fully priced into the financial markets.  Going forward, therefore, the peso is likely to stabilize or even rebound modestly as long as there are no new negative surprises.  In fact, technical indicators are positive for the peso.  Momentum indicators suggest the currency has been dramatically oversold.  In the closing days of August, the currency also strengthened, on modestly rising volume, and it has now regained its 20-day moving average.  Downside risks remain prevalent, but if the global financial environment stabilizes, the peso could well continue to recover lost ground in the coming weeks and months.

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1108

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