MexECON Blog

Peso Review - December 2014

In December, the Mexican peso fell 5.4% against the U.S. dollar, closing the month at a spot-market value of $0.0678 (14.75 pesos per dollar).  That followed declines of 3.2% in November, 0.5% in October, and 2.5% in September.  In 2014, the peso was down some 11.4%, with virtually all of the decline occurring over the last four months of the year.  In December, the currency fell sharply for almost half the month, but it then found its footing and was relatively stable throughout the last two weeks.

Comment:  Mexico's economic fundamentals remain relatively attractive, with stronger U.S. demand prompting a rise in exports, the domestic construction sector in a continued rebound, and unemployment gradually falling.  As I predicted last month, however, the peso has continued to suffer from concerns about a hike in U.S. interest rates in mid-2015, slowing economic growth and increasing geopolitical risks outside of North America, and extreme weakness in global oil prices.  The weakness in oil prices has been especially problematic.  Many investors still fail to appreciate that the vast majority of Mexican exports consist of manufactured goods, rather than petroleum products.  They therefore believe that low oil prices will weigh heavily on the Mexican economy.  Likewise, many investors are concerned that low oil prices will have a disastrous effect on Mexico's budget, which relies heavily on oil revenues.  These concerns seem overblown, especially since the government has hedged all of the country's expected oil production for the coming year at $76.50 per barrel, well above current market prices.  Nevertheless, the concerns are having a significant negative impact on the peso.

Looking forward, growing U.S. demand for Mexican goods and services should help keep the economy growing.  However, that could well be offset by concerns about liquidity drying up in the face of higher U.S. interest rates, weak economic growth around the world, and continuing low oil prices.  Momentum indicators suggest the currency is not quite as oversold as it had been a month ago, but other technical signs suggest that could simply set the peso up for continued declines.  The currency's next major support area is at approximately $0.0665 (15.04 pesos per dollar).  On the upside, the currency's next major resistance area is at approximately $0.0688 (14.53 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

                                                       U.S. Dollars Per Peso
Peso 1412

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