MexECON Blog

Peso Review - October 2012

The Mexican peso fell 1.5% against the U.S. dollar in October, ending the month at a spot-market value of $0.0764 (13.09 pesos per dollar).  The currency is now trading at its lowest level in almost two months.  The peso had one short-lived pullback early in the month, but it began a sustained downtrend only in the second half of October, when it was apparently pulled down by weak earnings reports in the United States and some signs of renewed debt woes in Europe. 

Comment:  In recent months, the peso has been particularly sensitive to the ebb and flow of the European debt crisis.  When the debt crisis has flared up, global investors have shied away from riskier assets, and the peso has fallen.  When the crisis seemed to stabilize, investors once again focused on Mexico's strong economic growth, healthy fiscal stance, and relatively high interest rates, channeling capital back into Mexico and driving the peso higher.  Since the decline in the peso during October seemed to coincide with a series of weaker-than-expected earnings reports north of the border, we've all been reminded that the Mexican economy and Mexican assets are normally most sensitive to events in the United States, not Europe.

Looking forward, the peso will continue to reflect the situation in Europe, but it may be driven more by the recent weak earnings season in the United States and the risk of a sharp tightening in U.S. fiscal policy.  These considerations may well outweigh Mexico's positive economic fundamentals until the end of the year and keep the currency under pressure.  Because of high inflation, Banco de México has recently signaled that it might raise interest rates in the coming months, and that could be enough to put the peso on an uptrend again.  However, any move in Mexican interest rates may be delayed until 2013.  Technical factors are similarly mixed for the peso.  Not only has the peso fallen below its 20-day and 50-day moving averages, but it has stayed there for an extended period, and it has fallen below a key support level at approximately $0.0770 (12.99 pesos per dollar).  On the other hand, momentum indicators suggest the peso is already oversold.  The next major support level for the currency is at approximately $0.0758 (13.20 pesos per dollar).  The next major resistance levels are at approximately $0.0770 (12.99 pesos per dollar) and $0.0776 (12.89 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                    U.S. Dollars Per Peso
                                                 Source:  TradingCharts.com
Peso 1210

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