MexECON Blog

Peso Review - April 2013

The Mexican peso rose 1.6% against the U.S. dollar in April, closing the month at a spot-market value of $0.0824 (12.14 pesos per dollar).  That followed a jump of 3.7% in March and a slight decline of 0.5% in February.  The peso now stands at its highest level since summer 2011.  The currency rose strongly in the first third of April before giving back some of its gains in the middle third of the month.  It then traded roughly flat in the last part of the month.

Comment:  The peso has now risen some 18.4% since last June.  The uptrend was initially sparked by the European Central Bank's promise last summer to do "whatever it takes" to preserve the Euro Zone.  That helped calm global markets and allowed investors to once again focus on Mexico's good economic fundamentals.  With central banks in the developed countries keeping interest rates at record lows, investors around the world have become attracted to Mexico's good growth, low debt levels, and relatively high interest rates.  Net foreign purchases of Mexican stocks and bonds surged 59.7% in 2012, and those capital flows appear to be continuing in 2013.  This dynamic got a further boost at the beginning of April, when the Bank of Japan (BOJ) said it would loosen its monetary policy even more aggressively than had been expected.  The yen weakened further in response.  Just as important, the BOJ action confirmed that there was no hope of Japanese interest rates rising in the foreseeable future.  The peso's jump in early April suggests at least some global investors responded by rolling out of yen and into pesos.

The most likely scenario going forward is that Mexico's good fundamentals will continue to attract capital, driving the peso at least a bit higher.  That is especially the case if central banks in the developed world maintain their current low interest rates and keep pumping liquidity into the financial markets.  Nevertheless, it is important to remember that even Mexico's economy is starting to moderate.  Some sectors have weakened substantially.  With technical indicators suggesting the peso is somewhat overbought, it would be no surprise if a negative report out of the United States or Mexico sparked a temporary correction.  A sell-off could also come if there is a new flare-up of the European debt problem or an international security crisis.  The peso's next major resistance levels are at approximately $0.0833 (12.00 pesos per dollar) and $0.0840 (11.90 per dollar).  The currency's next notable support levels are at $0.0818 (12.22 pesos per dollar) and $0.0815 (12.27 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                   U.S. Dollars Per Peso
Peso 1304

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