MexECON Blog

Peso Review - July 2014

In July, the Mexican peso fell 1.8% against the U.S. dollar, closing the month at a spot-market value of $0.0756 (13.23 pesos per dollar).  That marked the second straight monthly decline, after the currency fell 0.9% during June.  The peso is now trading at its lowest level since mid-March.  It is important to note, however, that the currency had been trending modestly upward until the last week of July.  At that point, good economic data from the United States rekindled fears that the U.S. Federal Reserve might tighten monetary policy earlier than anticipated, and a new debt default by Argentina scared investors away from emerging market assets.  As a result, the peso fell sharply for four straight days at the very end of the month.

Comment:  As I predicted in last month's review, Mexico's rebounding economic growth and continued fiscal discipline were helping propel the peso upward through most of July.  If it weren't for the unexpected uptick in U.S. economic performance and the surprisingly irresponsible behavior of Argentina with regard to its debts, the peso would likely have continued to rise.  As it is, the U.S. acceleration and the Argentine default were more than enough to overwhelm Mexico's improving economic fundamentals.  To make matters worse, Banco de México had slashed interest rates at the beginning of June, removing some of the advantage in putting capital to work in Mexico and leaving the country relatively more vulnerable when investors began to get skittish about the emerging markets.

Looking forward, it is still too early to know whether the peso will swoon further, stabilize, or begin to stage a rebound.  Mexico's economic fundamentals are likely to remain solid, which should provide important support for the currency.  However, when investors have been worrying about tighter U.S. monetary policy in the recent past, the downward pressure on the peso has persisted for some time.  Moreover, it will probably take some time for investors to digest the new Argentine debt default.  Against this backdrop, just about anything could happen.  Technical considerations also are mixed.  Clearly, the recent downtrend has been quite pronounced.  On the other hand, momentum indicators show the peso is already over-sold.  The currency's next major support zone is at approximately $0.0752 (13.30 pesos per dollar).  Its next major resistance area is at approximately $0.0762 (13.12 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                           U.S. Dollars Per Peso
Peso 1407

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