MexECON Blog

Peso Review - January 2012

In January, the Mexican peso jumped 7.0% against the U.S. dollar, closing the month at a spot-market value of $0.0766 (13.06 per dollar).  The increase was more than enough to erase the currency's 2.3% slide in December, and it left the peso at its highest level since late November.  The peso climbed throughout January, closing near its monthly high of $0.0779 (12.84 per dollar).

Comment:  With the peso's surge in January, it looks like the currency is finally reflecting the unexpected strength in the North American economy that I've been discussing for the last couple of months.  Incoming data from the United States, Canada, and Mexico generally remain much stronger than readings coming out of Europe and Asia (though many of today's purchasing managers' reports from those regions have surprised on the upside, suggesting the gathering strength in North America may be buoying activity elsewhere).  Coupled with stronger policy efforts to deal with the debt crisis in Europe, these developments have encouraged a return to risk investing, and the peso is responding with gusto.

Mexico's continuing good economic growth, healthy fiscal policy, and high interest rates should provide further support for the peso in the coming months.  In addition, Mexican policymakers have taken precautions to limit the damage if the European debt crisis worsens again.  For example, Mexico's foreign currency commission (composed of officials from the central bank and finance ministry) said at the end of November that it would temporarily suspend selling dollar put options and direct 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.  Some technical indicators are also positive.  The peso has easily broken above its 20-day and 50-day moving averages, and it is now regularly posting higher highs and higher lows.  However, momentum indicators show the currency is already heavily bought.  Unless the European debt crisis worsens significantly again or Asian economic growth slows more precipitously, this suggests any near-term pullbacks may only be temporary.  The currency's next resistance level is at approximately $0.0800 (12.50 per dollar).  Its nearest support level is at approximately $0.0760 (13.16 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                      U.S. Dollars Per Peso
                                                Source:  TradingCharts.com
Peso 1201

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