The Mexican peso rose 0.8% against the U.S. dollar in December,
closing the month at a spot-market value of $0.0777 (12.87 pesos
per dollar). The currency rose briskly throughout the first
half of the month, when it appeared U.S. politicians would reach a
deal to avert the "fiscal cliff" of sharp tax hikes and spending
cuts programmed for year-end. When the negotiations began to
falter, however, the peso fell sharply. The currency only
rebounded at the very end of the month.
For full-year 2012, the peso was up 8.5%, reversing much of
its 11.4% drop in 2011.
Comment: At this writing, late
on New Year's Day, it is still not entirely clear whether the
United States will find a way to avoid the sharp fiscal tightening
that threatens in 2013. If no deal is reached, U.S. demand is
likely to soften considerably, and the Mexican economy could
slow. Those considerations are outweighing the peso's strong
fundamentals, which include Mexico's good economic growth,
relatively high interest rates, healthy fiscal situation, and a new
president who has promised to pursue needed reforms. In the
background, the European debt crisis also remains a threat.
Looking forward, the peso will be driven in the near term by the
U.S. policy debate. If no deal is reached, or if any deal is
badly received, the peso will come under renewed pressure.
Technical factors are mildly positive for the peso, with the
currency's jump over the last couple of days bringing it above both
its 50-day and 20-day moving averages and momentum indicators
suggesting the currency is somewhat oversold. The key driver,
however, will remain the U.S. situation. The next major
resistance level for the peso is at approximately $0.0785 (12.74
pesos per dollar). The next major support level is at
approximately $0.0774 (12.92 pesos per dollar).
Patrick Fearon, CFA
Vice President, Fund Management
U.S. Dollars Per Peso