MexECON Blog

Peso Review - June 2014

In June, the Mexican peso fell 0.9% against the U.S. dollar, closing the month at a spot-market value of $0.0770 (12.99 pesos per dollar).  However, that reversed only a portion of the strong 3.9% rebound in the currency over the previous four months.  Taking into account the peso's sharp decline in January, its subsequent rebound from February through May, and its modest correction in June, the currency is still up 0.5% for the year to date. 

Comment:  Economic fundamentals for the peso are not only positive, but they are improving.  The most important development has been a noticeable acceleration in exports, which could help offset some of the weakness in Mexico's domestic demand and boost economic growth in the coming months and quarters.  The government's economic reform program also holds out the promise of stronger growth in the longer term.  Mexico's budget deficit remains under control, and its debt levels are relatively low.  New sales taxes that took effect at the beginning of the year caused a spike in inflation and a sharp contraction in consumer spending, but those problems are now receding.  Against this backdrop of good fundamentals, the drop in the peso during June therefore can be attributed to two main issues.  First, as I mentioned in last month's Peso Review, technical indicators showed the peso had become overbought, so a short-term correction was due.  Second, Banco de México surprised the market with a big cut in interest rates in early June, seeking to give a further boost to the economy.  Because lower interest rates remove some of the incentive for international capital to flow into Mexico, the rate cut helped drive the peso lower.

Looking forward, the peso seems set for a renewed uptrend.  Mexico's economic fundamentals are likely to keep improving modestly, especially if stronger U.S. demand leads to further gains in Mexico's exports.  In the coming days, the government's economic reform program may also advance further, as the country's Congress is scheduled to pass some key implementing legislation.  Even the U.S. Federal Reserve's ongoing program to reduce its asset purchases is having less negative impact on the peso, as global investors have become convinced that global liquidity will decline only gradually.  Technical indicators are also more positive than they were at the beginning of last month.  For example, chart action shows the peso posting a series of higher highs and higher lows since late June.  The currency has also moved above its key moving averages, helping confirm that a new uptrend is in place.  Finally, the correction in early June has left the currency somewhat oversold, giving it room for further increases.  The peso's next notable resistance areas are at approximately $0.0774 (12.92 pesos per dollar) and $0.0780 (12.82 pesos per dollar).  Its next notable support level is at $0.0767 (13.04 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                      U.S. Dollars Per Peso
Peso 1406

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