MexECON Blog

Peso Review - January 2014

In January, the Mexican peso fell 2.3% against the U.S. dollar, closing the month at a spot-market value of $0.0748 (13.37 pesos per dollar).  The decline was more than sufficient to erase the small December gain of 0.4%, and it left the currency at its lowest level since early September.  The peso strengthened modestly in the first part of January, but it then fell sharply through the rest of the month, ending the period with dramatic swings up and down.  On January 24, the currency touched an intraday low of $0.0735 (13.61 pesos per dollar).

Comment:  In a repeat of last summer, international investors have begun to pile out of their investments in the so-called emerging markets.  Over the last several years, extremely loose monetary policy in most developed countries led to low interest rates and high levels of liquidity.  Investors responded by channeling much of their money into higher yielding investments in developing countries such as Mexico.  Once the U.S. Federal Reserve began to signal that it would slow its asset purchases, investors realized that liquidity would eventually fall, and they are now rushing to be first to the exit.  The stampede out of the emerging markets has been indiscriminating so far.  Investors have been fleeing not only from developing countries that are suffering from acute economic imbalances, such as Turkey and India, but also from countries with much better fundamentals.  They have punished the peso even though Mexico has returned to growth after an economic soft spot in 2013, and even though its budget deficit and foreign debt are quite modest.  It is true that weakness in key domestic sectors could limit any acceleration in Mexico's economic growth rate in 2014, and the government has planned to modestly increase the deficit to boost growth.  Nevertheless, the flight from Mexican assets seems excessive when considering the country's good fundamentals relative to many other developing countries.

Looking forward, the peso's fate depends on whether investors' panic about the emerging markets gets worse, or whether they begin to take a more rational approach and start to discriminate between weaker countries and stronger countries.  If investors regain their wits, the peso could soon find a floor and even rally, especially as momentum indicators suggest the currency is already deeply oversold.  Indeed, the peso looked like it wanted to rally in the final days of January.  On the other hand, investors' animal spirits are notoriously difficult to predict.  The current rout could continue and even get worse, dragging the peso lower.  The peso's inability to hold above its 20-day moving average in late January was especially worrying.  The currency's next notable support levels are at approximately $0.0735 ($13.61 pesos per dollar) and $0.0720 (13.89 pesos per dollar).  Its next notable resistance level is at approximately $0.0755 (13.25 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

U.S. Dollars Per Peso
Peso 1401

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