MexECON Blog

Peso Review - September 2012

The Mexican peso rose 2.4% against the U.S. dollar in September, ending the month at a spot-market value of $0.0776 (12.89 pesos per dollar).  The currency surged in the first half of September, after the European Central Bank (ECB) committed to buy the bonds of any Euro-zone governments that enter a financial bailout program, which many investors took as a positive step toward reducing the risk of an uncontrolled financial crisis.  The peso reached an intraday high of $0.0786 (12.72 pesos per dollar) on September 15, for its strongest level since March.  The currency then gave back some of its gains before stabilizing through month's end.

Comment:  After the latest flare up in Europe's debt crisis this spring - including two chaotic elections in Greece - international investors scurried out of riskier assets, and the peso took a drubbing.  Now that the situation looks more benign again, the peso has been on the upswing.  Some of the improvement in the peso may reflect recent signs that the U.S. economy is stabilizing, but the currency's recent movements depend mostly on global sentiment on Europe and the possibility of international contagion from the Continent's debt crisis.

Looking forward, the peso's direction will continue to depend primarily on the situation in Europe.  When it looks like the Europeans are gaining control over their debt situation, the currency is likely to rally, and vice versa.  However, some other fundamentals are also turning positive for the peso.  For example, the U.S. economy does not appear to be slowing as rapidly as it was during the spring and summer.  If U.S. demand stabilizes or starts to accelerate again, the Mexican currency will tend to rise.  Just as important, recent data and press reports suggest policymakers at Banco de México may be starting to worry more about inflation, which could ultimately prompt them to raise interest rates.  In a world where rates are extraordinarily low, investors would likely flock into Mexican assets if they saw not only the country's current strong economic growth and healthy fiscal policy, but also the prospect of higher yields and contained inflation.  Technical indicators suggest the peso is already over-bought, so any further move upward might face some headwinds.  Nevertheless, prospects for the currency at the moment appear favorable.  The next major resistance level for the peso is at approximately $0.0786 (12.72 pesos per dollar).  The next major support level for the currency is at approximately $0.0770 (12.99 pesos per dollar.

Patrick Fearon, CFA
Vice President, Fund Management

                                                   U.S. Dollars Per Peso
Peso 1209

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