MexECON Blog

Peso Review - February 2013

The Mexican peso fell 0.5% against the U.S. dollar in February, closing the month at a spot-market value of $0.0782 (12.79 pesos per dollar).  That marked the currency's first decline after three straight months of increases.  The currency spent most of the month bouncing around $0.0788 (12.69 pesos per dollar), but it began to weaken noticeably in the last week of the period on renewed concerns about the European debt crisis, signs of slowing in the Mexican economy, and statements by Banco de México Governor Agustín Carstens that warned of destabilizing capital flows and the possibility that Mexican interest rates could soon be cut.

Comment:  When Europe's debt crisis last flared up almost one year ago, the peso retreated and fell as low as $0.0697 (14.35 pesos per dollar) by the end of May 2012.  Then, the European situation calmed down, in large part because of reassuring statements and actions by the European Central Bank.  That period of calm allowed investors to focus again on Mexico's good fundamentals, including its low debt, continuing economic growth, and relatively high interest rates.  It should be no surprise that the currency responded with a long period of appreciation.  Now, poor European economic data and political challenges such as Italy's inconclusive elections threaten to rekindle global financial fears.  Perhaps more important, Mexico's own economic statistics have taken a turn for the worse, and the central bank now looks like it will cut interest rates in the near future.  The peso's weakness in late February probably reflects all these problems.

Looking forward, the peso will probably face increased fundamental challenges in the near term.  Developments in Europe, tighter U.S. fiscal policy, slowing economic growth in Mexico, and the possibility of Mexican interest rate cuts will probably weigh on the currency, at least as long as the external and domestic trends continue as they have been.  Technical indicators are also pointing to softness.  The peso has been posting lower lows and lower highs since mid-January.  It has not only fallen below its key moving averages, but it has stayed below them.  Momentum indicators do not suggest the peso is oversold yet, so it seems to have room to fall further.  The peso's next major support levels are at $0.0780 (12.82 pesos per dollar) and $0.0775 (12.90 pesos per dollar).  Its next major resistance level is at $0.0788 (12.69 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                       U.S. Dollars Per Peso
                                                   Source:  TradingCharts.com
Peso 1302

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