MexECON Blog

Peso Review - October 2013

In October, the Mexican peso rose 0.5% against the U.S. dollar, closing the month at a spot-market value of $0.0768 (13.02 pesos per dollar).  That followed a 2.3% increase in September and a 4.7% decline in August.  Even though the peso's rise over the course of October was only modest, the currency was actually somewhat volatile during the month.  After holding steady around its previous monthly close in the first part of October, it staged a dramatic jump after policymakers north of the border began to move toward ending the partial shutdown of the U.S. government.  The currency hit an intra-month high of $0.0784 (12.76 pesos per dollar) on October 18.  It then began to bounce around a range slightly below that level for approximately one week, before falling consistently in the last several days of the month.

Comment:  The peso's pullback in the second half of October is a telltale sign that it remains at the mercy of investor expectations regarding U.S. fiscal politics and monetary policy.  Investors rightly cheered the end of the partial government shutdown in mid-October, but it appears that they are now focusing on the fact that the deal was only temporary, and that yet another crisis could follow by January.  Moreover, a range of indicators suggests that investors are once again bracing themselves for the U.S. Federal Reserve to reduce its purchases of longer-term assets.  I suspect such a reduction may be a bit further down the road, but the fear of less liquidity in the United States is still enough to prompt many international investors to pull back from the peso.  The fears regarding events in the United States seem more than strong enough to offset the recent signs that Mexico's own economy might be starting to strengthen again.

Looking forward, I believe the peso will most likely soften a bit further as more investors focus on the next set of fiscal deadlines north of the border and the potential for the Federal Reserve to begin tightening policy.  Technical indicators also point in this direction, with the peso having just slipped below both its 20-day and 50-day moving averages and momentum indicators suggesting the currency may still be a bit over-bought.  However, the currency could rebound quickly if the U.S. fiscal talks prove more conciliatory than expected, weaker economic data point to a long-term continuation of U.S. monetary policy, or new reports show a dramatically strengthening economy in Mexico.  The peso's next notable support level is at approximately $0.0756 (13.23 pesos per dollar).  Its next notable resistance level is at approximately $0.0778 (12.85 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                     U.S. Dollars Per Peso
Peso 1310

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