MexECON Blog

Peso Review - December 2013

In December, the Mexican peso rose 0.4% against the U.S. dollar, closing the month at a spot-market value of $0.0766 (13.05 pesos per dollar).  Nevertheless, the currency was still down 1.4% over the course of 2013, after an 8.5% rise in 2012.  The peso remained choppy in December, posting a big rebound early in the month but then sliding consistently over the last three weeks.

Comment:  From mid-2012 to mid-2013, the peso benefited from a range of fundamental factors.  Global investors focused more heavily on the country's increased economic competitiveness and strong recovery from its 2008-2009 recession, loose monetary policy in the United States drove many investors to Mexico in search of higher yields, and tentative signs of accelerating U.S. growth raised hopes for higher exports.  However, when the U.S. Federal Reserve began to signal tighter monetary policy in the late spring of 2013, investors began to reposition their portfolios.  The Mexican economy also began to slow dramatically as foreign trade came in softer than anticipated and demand dropped sharply in several important domestic sectors.  Those factors not only undermined the peso throughout the second half of 2013, but they continued to weigh on the currency through the end of the year.

Looking forward, I expect investors to remain cautious regarding the peso, especially now that the Federal Reserve has actually started to tighten policy by slowly reducing the amount of assets that it purchases every month.  A cut in asset purchases puts less liquidity into the global financial markets and could allow interest rates to rise, reducing the incentive to park funds in higher-yielding countries such as Mexico.  However, recent signs of reacceleration in both the U.S. and Mexican economies could soften the blow, so any further decline in the peso may be modest.  Technical indicators are perhaps a bit negative, with the currency recently trending downward, and with it currently trading below its key moving averages.  On the other hand, momentum indicators are essentially neutral, and the currency would not have to fall very far to reach a strong support level.  The peso's next notable support level is at approximately $0.0757 ($13.21 pesos per dollar).  Its next notable resistance level is at approximately $0.0777 (12.87 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                    U.S. Dollars Per Peso
                                                Source:  TradingCharts.com
Peso 1312

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