MexECON Blog

Peso Review - November 2014

In November, the Mexican peso plunged 3.2% against the U.S. dollar, closing the month at a spot-market value of $0.0717 (13.95 pesos per dollar).  That followed declines of 0.5% in October and 2.5% in September.  The peso is now down approximately 6.4% from the beginning of 2014, and it is trading at its lowest level in more than two years.  The currency was actually steady at a weak level during the first three weeks of November, but it then declined relentlessly in the last week of the month, including a huge drop last Friday.

Comment:  The peso has faced an onslaught of new downward pressures over the last several months.  Now that the U.S. Federal Reserve has stopped buying new assets, investors are focused on the likelihood that it will hike U.S. interest rates around mid-2015.  That would be expected to dry up some of the liquidity in global financial markets and prompt investors to sell some of their emerging-market assets, including the peso.  On top of that, new geopolitical risks such as the Ebola epidemic and the rise of the Islamic State have weighed on global sentiment, even as violence, crime, and a newly expansive fiscal policy have prompted renewed concerns about the Mexican government's ability to manage the country.  A major problem that arose over the last couple of weeks is the dramatic drop in global oil prices.  Mexican exports are much less dependent on petroleum than many observers realize - indeed, manufacturing exports are much more important, and they have recently been accelerating - but government revenues are highly dependent on oil revenue.  The fall in oil prices has therefore kindled concern about the government's fiscal health.

Looking forward, the peso could get some support from the recent strengthening in Mexico's overall exports and an improvement in domestic demand, but I suspect that would be offset by the fundamental problems discussed above.  As I noted last month, technical indicators show the peso is already oversold, so there is the possibility of at least a short-term rebound.  Nevertheless, the charts are as yet showing no sign of a reversal.  The peso could easily weaken further.  The currency's next major support area is at approximately $0.0700 (14.29 pesos per dollar).  On the upside, its next major resistance area is at approximately $0.0733 (13.64 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                       U.S. Dollars Per Peso
Peso 1411

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