MexECON Blog

Peso Review - November 2012

The Mexican peso rose 0.9% against the U.S. dollar in November, closing the month at a spot-market value of $0.0771 (12.97 pesos per dollar).  The currency posted a large decline in the week after the U.S. presidential election on November 6, as investors began to focus on the threat of a year-end "fiscal cliff" of sharp tax hikes and spending cuts north of the border.  The peso fell to an intraday low of $0.0752 (13.30 pesos per dollar) on November 14.  After that, however, U.S. politicians began to show more signs of compromise, and the peso rebounded almost without pause through the end of the month.

Comment:  There are plenty of fundamental factors that would like to drive the peso higher, including Mexico's strong economic growth rate, healthy fiscal stance, and relatively high interest rates.  However, the currency in recent months has traded much more on external events.  First, it was the European debt crisis.  Then, it was slowing corporate profits in the United States.  Now, it's U.S. fiscal policy.  The concern about the U.S. fiscal cliff is a reminder that Mexico is heavily dependent on the United States for its exports and capital flows.

In the coming months, the peso will continue to be heavily impacted by the situation in Europe and by unfolding events in the U.S. economy.  If it looks like U.S. politicians will strike a deal to put off the tax hikes and spending cuts that would otherwise hit at the end of the year, investors will likely focus again on Mexico's strong fundamentals and drive the peso higher.  That is especially true since Banco de México repeated on Friday that it was prepared to raise interest rates if inflation gets too high.  In addition, President Enrique Peña Nieto was inaugurated over the weekend, completing a smooth and violence-free transition of power.  Technical factors are tilted modestly in favor of the peso.  With its rebound from mid-November to the present, the currency is now trading above both its 20-day and 50-day moving averages, but momentum indicators have already turned neutral from flashing a buy signal a few weeks ago.  The next major resistance levels for the peso are at approximately $0.0781 (12.80 pesos per dollar) and $0.0786 (12.72 pesos per dollar.  The next major support levels are at approximately $0.0765 (13.07 pesos per dollar) and $0.0757 (13.21 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1211

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