MexECON Blog

Peso Review - July 2013

In July, the Mexican peso rose 2.0% against the U.S. dollar, closing the month at a spot-market value of $0.0784 (12.76 pesos per dollar).  That followed two straight months of correction, in which the currency had fallen by a total of 6.7%.  The peso began to recover in late June, and it continued to rise solidly through the first half of July, as investors set aside their fears of a premature tightening in U.S. monetary policy.  However, the move appeared to be too much, too soon, and the currency gave up a bit of its gains at the end of the month.

Comment:  Emerging-market currencies continue to be buffeted by investor concerns about the direction of monetary policy in the major developed countries.  Extremely loose policy by the U.S. Federal Reserve, the Bank of Japan, and other major central banks has produced lots of excess capital that is flowing around the globe in search of higher returns.  Much of that capital has been channeled into Mexico, owing to the country's good economic fundamentals.  Investors are especially attracted by the country's relatively high interest rates, healthy fiscal balance, and low debt.  Now, however, the Federal Reserve has begun to signal that its asset purchases might start to be wound down soon.  Benchmark interest rates are unlikely to rise significantly for the foreseeable future, but the possibility of smaller asset purchases has been enough to spook investors into pulling some of their funds out of Mexico and selling off the peso.

Looking forward, the peso could be entering a volatile period, as the major central banks struggle to figure out when and how to start tightening policy and investors struggle to interpret their moves.  There could be dramatic swings in sentiment and capital flows, so predicting the direction of the peso is difficult.  Unfortunately, technical indicators also are inconclusive.  The peso has been trending downward since mid-July, but at a moderate pace.  Because it is already at its key moving averages and close to an important support level, it might not have much further to fall, unless there is some event that rekindles concern about the world economy.  On the other hand, momentum indicators suggest the currency is still overbought, so a strong rebound might be difficult to imagine.  The peso's next notable resistance levels are at approximately $0.0790 (12.66 pesos per dollar) and $0.0802 (12.47 pesos per dollar).  Its next major support levels are at approximately $0.0780 (12.82 pesos per dollar) and $0.0772 (12.95 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1307


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