MexECON Blog

Peso Review - January 2013

The Mexican peso rose 1.4% against the U.S. dollar in January, closing the month at a spot-market value of $0.0788 (12.69 pesos per dollar).  That marked the third straight monthly increase in the peso, after gains of 0.8% in December and 0.9% in January.  The currency surged at the very beginning of the month, apparently on relief that U.S. policymakers found a workaround for the sharp tax hikes and spending cuts that had been scheduled for the first of the year.  The peso gave back some of those gains in the second half of the month, but as investors started to recognize improved economic and financial data around the globe, the currency started a renewed uptrend late in the month.

Comment:  With the U.S. "fiscal cliff" at least partially resolved, and with the European economic and financial situation apparently stabilizing, investors are once again free to focus on Mexico's good fundamentals.  The country's economic growth rate may be moderating, but it remains strong in comparison with past experience and in comparison with most other large countries.  A reacceleration in exports has boosted manufacturing, the labor market remains relatively healthy, and consumer spending is on the upswing.  At the same time, interest rates in Mexico are higher than in most developed countries, and the country's public-sector fiscal deficit is small.  As these strong fundamentals began to dawn on global investors in 2012, capital inflows into Mexico surged, putting added upward pressure on the peso.  As evidence of the peso's strong upward momentum, the mysterious explosion last night at the headquarters of Mexico's national oil company (Pemex) was only a brief drag on the currency when trading opened earlier today.

Going forward, Mexican fundamentals will probably continue to put upward pressure on the peso, at least as long as the upcoming U.S. fiscal battles do not get out of hand, the European debt crisis does not flare up again, and the Pemex explosion does not turn out to be terrorism or some other sign of broader political instability.  Technical factors also appear to be mildly positive for the peso.  Profit-taking in late January brought the currency down to its 50-day moving average, which has often provided a floor for the peso, and the currency has now popped back above its 20-day moving average.  The peso's dips in November 2011 and June 2012 form a nice looking double bottom formation, suggesting the currency is well positioned to move higher if it can just move above the next resistance level.  The peso's next major resistance level is at approximately $0.0794 (12.59 pesos per dollar), a point it has essentially reached three times in the last year but has not been able to surpass.  The next major support level is at approximately $0.0785 (12.74 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                    U.S. Dollars Per Peso
Peso 1301

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