MexECON Blog

Peso Review - May 2013

The Mexican peso fell 5.5% against the U.S. dollar in May, closing the month at a spot-market value of $0.0779 (12.84 pesos per dollar).  It was the currency's worst decline since May 2012, essentially erasing all of its increases in the previous two months.  However, the fall reversed only a portion of the peso's 18.4% increase from June 2012 through April 2013.  The peso rose smartly during the first third of May, but then declined sharply throughout the remainder of the month as investors began to worry about the possibility of tighter monetary policy in the United States and slowing economic growth in Mexico.

Comment:  Last month, I said the peso was likely to rise a bit further, but would be vulnerable to a correction if investors sensed that monetary policy in the major developed countries would tighten, that Mexican economic growth was slowing, or that the peso was overvalued.  As it turns out, all those things happened by mid-May, producing a decline in the peso that can almost be described as violent.

Looking forward, the near-term trend for the peso is downward, but there is a high probability the currency will soon find a floor.  Policymakers at the U.S. Federal Reserve and other major central banks have signaled they intend to keep monetary policy loose for as long as it takes to get their economies growing faster again.  Therefore, I suspect key policymakers will soon offer explicit reassurances that the market's fear about tighter monetary policy is misplaced.  That would allow investors to once again focus on Mexico's low debt levels and relatively high interest rates.  Also, recent reports suggest Mexico's economy is at least partially recovering from its soft spot at the turn of the year.  I suspect most incoming reports will continue to show improvement, making investors feel comfortable about the peso again.  Finally, technical indicators suggest the peso is already oversold.  The currency ended May very close to a major support level, so there is a good chance that it will soon stop falling.  The peso's next notable support levels are at approximately $0.0778 (12.85 pesos per dollar) and $0.0767 (13.04 pesos per dollar).  Its next major resistance levels are at approximately $0.0793 (12.61 pesos per dollar) and $0.0803 (12.45 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                               U.S. Dollars Per Peso
Peso 1305

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