MexECON Blog

Peso Review - May 2012

The Mexican peso plunged 9.2% against the U.S. dollar in May, closing the month at a spot-market value of just $0.0697 (14.35 per dollar).  That was much worse than the currency's 1.5% decline in April, and it marked the sharpest fall in the peso since last September.  The sell-off brought the value of the currency down to its lowest level since the worst days of the global financial crisis in early 2009.  The peso not only fell throughout May, but it was also very volatile, with numerous daily declines of 1.5% or more.  The steep slide in the peso came despite Banco de México's effort to stem the freefall by buying hundreds of millions of dollars worth of the currency late in the month.

Comment:  As discussed in last month's review, Mexico's good economic fundamentals should be boosting the peso.  However, Mexico's positive factors have been swamped by renewed waves of pessimism about the European debt crisis.  Recent elections in Europe have pointed to increased political discord about how to exit the crisis and a greater risk that Greece or other peripheral countries will reject the austerity programs on which their financial assistance depends, potentially leading to cascading defaults and unpredictable economic dislocations.  Moreover, a belated push by Spain to force its banks to come clean about their financial situation has laid bare the government's potential lack of funds to recapitalize its financial system and meet its other obligations.  To make matters worse, a poll published at the end of May unsettled investors by suggesting that leftist candidate Andrés Manuel López Obrador was coming within striking distance of winning Mexico's presidential election this summer.

Looking forward, there are plenty of reasons to expect political and economic issues to weigh on the peso for at least another month.  For example, new elections are expected in Greece in mid-June, and the presidential election in Mexico itself could become even more unpredictable up until polling on July 1.  Ominously, there are budding signs not only of a run on European banks but also of a general pullback from riskier assets in Europe, Asia and indeed around the globe.  Technical indicators offer little consolation.  Even though momentum indicators suggest the peso is deeply oversold, chart analysis points to a continued downtrend.  The next major support area for the peso is around $0.0650 (15.38 per dollar), approximately the currency's cycle low in early 2009.  There is little indication of a near-term rebound, but if conditions stabilize and the currency does turn up again, the next major resistance area is at approximately $0.0710 (14.08 per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1205

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