MexECON Blog

Peso Review - May 2014

In May, the Mexican peso rose 1.7% against the U.S. dollar, closing the month at a spot-market value of $0.0777 (12.87 pesos per dollar).  That came after a flat performance in April and gains of 1.3% in March and 0.9% in February.  The peso is now up 3.9% over the last four months, and it stands at its highest level since early December.

Comment:  As I noted in last month's review, economic fundamentals for the peso are constructive.  Mexican economic growth began to accelerate a bit in the first quarter, and if U.S. demand continues its recent improvement, exports are expected to give a further lift to the economy in the second quarter.  That could help offset some of the weakness in Mexico's domestic demand.  I still believe that the problems in domestic demand will limit the near-term potential for Mexican growth, but the outlook certainly looks rosier than it did a few months ago.  Moreover, Mexico's budget deficit remains under control, its debt levels are relatively low, and the spurt in inflation at the beginning of the year is already starting to moderate.  The government's economic reform program holds out promise for stronger growth in the future.  Now that Russia looks like it is having second thoughts about seizing more of Ukraine, even the international security situation looks calmer and more conducive for the peso.

Looking forward, Mexico's economic fundamentals are likely to remain constructive, especially if growth strengthens more than I expect.  If the international security environment remains calm, and if the U.S. Federal Reserve manages to keep dialing back its asset purchases in a way that avoids alarming international investors, the peso could well continue to rise.  Technical indicators are a bit more mixed.  While the recent upward trend is unmistakable in the charts, for example, the gains appear to be weakening, and momentum indicators suggest the currency is near-term overbought.  A temporary pause or modest correction could therefore be in the cards before the peso resumes its upward march.  The currency's next notable resistance areas are at $0.0782 (12.79 pesos per dollar) and $0.0791 (12.64 pesos per dollar).  Its next notable support level is at approximately $0.0771 (12.97 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                        U.S. Dollars Per Peso
Peso 1405

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