MexECON Blog

Peso Review - August 2014

In August, the Mexican peso rose 1.1% against the U.S. dollar, closing the month at a spot-market value of $0.0764 (13.09 pesos per dollar).  However, that was not enough to offset the currency's steep 1.8% decline in July and 0.9% fall in June.  Moreover, trading in the peso was quite volatile during August, with the currency rebounding spritely in the first half of the month but then spending the second half of the month bouncing around a trading range between approximately $0.0760 (13.16 pesos per dollar) and $0.0766 (13.05 pesos per dollar).  

Comment:  The peso's good rebound in the first half of August came as investors started to regain their wits after Argentina's latest debt default.  In July, that default had sparked a considerable pullback from the developing countries, but investors have now started to discriminate between the irresponsible behavior of Argentina and the good economic fundamentals and investor-friendly policies of other key developing countries, such as Mexico.  In addition, it has become clear that the recent rebound in the U.S. economy is helping propel a reacceleration in Mexican exports, even as the country's long-suffering construction sector is starting to rebound.  The gathering strength in the Mexican economy has even sparked speculation that Banco de México will soon start to consider raising interest rates again.  That would likely prompt renewed interest in Mexican assets and renewed buying of the peso.

Looking forward, I believe it's still a bit too early to call a new trend for the peso.  Mexico's economic fundamentals remain positive, and the possibility of future rate hikes should give further support to the currency.  On the other hand, the U.S. economic rebound could also prompt the Federal Reserve to start tightening policy earlier than expected, and worries about higher interest rates in the United States have weighed heavily on the peso over the last year or more.  Technical indicators are also inconclusive, with the peso showing signs of being mired in a trading range and momentum indicators being neutral.  The only technical issue of concern is that the peso seems to have formed a "double top" formation in the second half of August.  If the peso now drops below the neckline of that formation, at $0.0760 (13.16 pesos per dollar), it could drop quickly toward its next major support zone.  That support zone is at approximately $0.0751 (13.32 pesos per dollar).  If the currency breaks out of the top of its current trading range, its next major resistance area is at approximately $0.0771 (12.97 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                               U.S. Dollars Per Peso
                                                           Source:  TradingCharts.com
Peso 1408

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