MexECON Blog

Peso Review - February 2014

In February, the Mexican peso climbed 0.9% against the U.S. dollar, closing the month at a spot-market value of $0.0755 (13.25 pesos per dollar).  However, the rise was not enough to offset the currency's 2.3% decline in January, and it is still down some 9.6% from its most recent high back in May 2013.  The peso actually plunged sharply at the very beginning of February, but it quickly bounced back.  It then spent the rest of the month in a trading range between approximately $0.0750 (13.33 pesos per dollar) and $0.0755 (13.25 pesos per dollar).

Comment:  Like many currencies, the peso in January had been caught in the downdraft as global investors piled out of the so-called emerging markets.  Investors at the time were worried that reduced asset purchases by the U.S. Federal Reserve would cut liquidity in the world's financial markets, and so they stampeded out of both weaker countries, such as Turkey, and healthier countries, such as Mexico.  Fortunately, investors seemed to regain their wits in February.  However, the calm may be temporary.  Russia's military incursion into its former territory in the Crimea at the end of last week could again sour the mood on the emerging markets.  At any rate, the bouts of emerging market selling since last summer are a reminder of the risks when the Federal Reserve not only reduces its asset purchases but eventually starts raising interest rates.

Looking forward, the peso could well continue to be caught up in the broader market sentiment and worries about the emerging markets.  The currency has been behaving remarkably well so far this morning, in spite of the situation in the Crimea, but it could easily reverse if the situation there deteriorates further.  Mexico's overall economic fundamentals should also be supportive of the currency - especially its disciplined fiscal policy, relatively low debt levels, and ongoing economic reforms - but recent reports seem to confirm my fears that the country is entering into a period of slow growth.  Meanwhile, technical indicators on the peso are inconclusive.  The currency is trading right at its 20-day and 50-day moving averages, and it has been exhibiting virtually no trend over the last month or so.  Momentum indicators are neutral.  On balance, I believe the peso's near-term downside risks outweigh its near-term upside potential.  The currency's next notable support levels are at approximately $0.0750 (13.33 pesos per dollar) and $0.0743 (13.46 pesos per dollar).  Its next notable resistance level is at approximately $0.0758 (13.19 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                      U.S. Dollars Per Peso
Peso 1402

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