MexECON Blog

Peso Review - March 2013

The Mexican peso jumped 3.7% against the U.S. dollar in March, closing the month at a spot-market value of $0.0811 (12.33 pesos per dollar).  The rise in March was more than enough to erase the February decline of 0.5%.  In fact, it lifted the peso to its highest level since September 2011.  The currency traded flat through the first third of the month, as it struggled with the headwinds I highlighted in my February review.  However, it surged after Banco de México cut its benchmark interest rate to 4.00% on March 9.  The currency then continued to rise until month's end.

Comment:  Since last June, the peso has risen in seven months, remained flat in one month, and fallen in just two months.  It has gained approximately 16.5% in the period.  This uptrend was sparked mostly by the European Central Bank's promise last summer that it would do "whatever it takes" to preserve the Euro Zone.  That promise helped calm global markets and allowed investors to once again focus on Mexico's good fundamentals, including its healthy economic growth, low debt, and relatively high interest rates.  The striking thing about the peso's surge in March is that it came against a backdrop of yet another flare-up in the European debt crisis, this time in Cyprus.  It appears that the peso is now at least partially decoupled from the fears of European contagion that caused it so many problems from mid-2011 to mid-2012.  One reason for this decoupling is probably that Mexican data now suggests the economy is solidifying again after hitting a soft spot at the turn of the year.  However, I believe the main reason is that the central bank's March rate cut was interpreted as sufficient to maintain economic growth but insufficient to discourage the recent strong capital flows into Mexico.  Net foreign purchases of Mexican stocks and bonds surged 59.7% in 2012, putting ever greater upward pressure on the peso, and it now appears those capital inflows will continue in 2013.  Foreign purchases of Mexican government bonds have been particularly strong, and against a backdrop of extremely low interest rates in the developed countries, yield-hungry investors continue to snap them up.  Banco de México may have hoped that lower interest rates would slow the inflow of this "hot money."  If so, their move has backfired.

Looking forward, it is clear that some of the economic challenges I feared last month have dissipated.  At the same time, the inflow of foreign capital has taken on a dynamic of its own, helping push the peso higher.  That may well continue, as long as nothing happens to spook the hot money back out of Mexico (a severe worsening of the European debt crisis or a sharp slowdown in the U.S. economy, for example).  Technical indicators suggest the peso is already overbought, but if a hot money dynamic is really in place, the currency could keep trending upward.

Patrick Fearon, CFA
Vice President, Fund Management

                                                 U.S. Dollars Per Peso
Peso 1303

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