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