MexECON Blog

Peso Review - December 2011

In December, the Mexican peso fell 2.3% against the U.S. dollar, closing the month at a spot-market value of $0.0716 (13.97 per dollar).  It was the currency's second straight monthly decline, after a 2.0% fall in November.  However, the peso was much less volatile in December than it has been in recent months.  The currency merely drifted downward through most of the month, ending at just about its low for the period.  At the beginning of 2011, the peso had stood at $0.0808 (12.38 per dollar).  Its decline for the year came to 11.4%.  

Comment:  The slow-motion financial crisis in Europe and weakening economic growth in Asia continue to sap the confidence of global investors, helping deflate the peso.  It is encouraging that the peso has recently been much less volatile than during the summer and autumn.  Recent data also suggest the North American economy has developed some momentum of its own.  Nevertheless, investors' risk appetite for emerging market currencies continues to depend on the latest news from Europe and Asia.

Going forward, Mexico's continuing good economic growth, healthy fiscal policy, and high interest rates have the potential to provide further support for the peso and limit its downside, at least as long as the European crisis does not get dramatically worse and the slowdown in the Asian economy does not get too bad.  In addition, Mexico's foreign currency commission (composed of officials from Banco de México and the Ministry of Finance) has temporarily suspended selling dollar put options and has directed the central bank to auction up to $400 million of its reserves on any day when the peso falls by more than 2.0% against the dollar.  These measures are meant as insurance against a worsening of the European and Asian situations, and they have probably been one reason for the recent calm in peso trading.  Technical indicators are currently neutral for the peso.  The currency is clearly trending downward, and it has not been able to break above its 20-day moving average.  Momentum indicators suggest the peso is neither over-bought nor over-sold at the moment.  The currency is bumping up against a resistance level at $0.0722 (13.85 per dollar), and after that, the next resistance level would be found at approximately $0.0730 (13.70 per dollar).  The nearest support levels are at $0.0712 (14.05 per dollar) and $0.0700 (14.29 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                      U.S. Dollars Per Peso
Peso 1112

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