MexECON Blog

Peso Review - January 2015

In January, the Mexican peso fell 1.6% against the U.S. dollar, closing the month at a spot-market value of $0.0667 (14.99 pesos per dollar).  That marked the seventh decline in the last eight months, leaving the currency down 14.2% since its most recent high last May.  Early in January, the peso staged a modest rebound.  It then spent most of the month in a trading range around $0.0685 (14.60 pesos per dollar).  However, it plunged during the last trading days of the month.

Comment:  The strengthening U.S. economy continues to buoy Mexican exports, reflecting the fact that manufactured goods are by far the country's most important product on overseas markets.  Strong export growth in autos, auto parts, and other manufactured goods has easily offset the fall in Mexico's oil exports, which have suffered from an ongoing decline in production and the recent plunge in global petroleum prices.  On the domestic side of the economy, commercial and residential investment is rising, and falling unemployment holds out the promise of stronger consumer spending.  The government may have increased its spending recently, but fiscal policy remains relatively balanced, and it debt is modest.  Nevertheless, investors continue to discount Mexico's relatively positive fundamentals.  Investors are more focused on the threat of increased interest rates in the United States and potential fiscal problems down the road due to the Mexican government's heavy reliance on oil revenues.  Those concerns have already prompted the government to start bolstering the peso's defenses.  For example, Banco de México and the Ministry of Finance late last year reactivated a program of dollar auctions on any day when the peso drops 1.5% or more.  Banco de México Governor Agustín Carstens has also recently indicated that he is willing to hike rates in the event that rising U.S. rates spark a destabilizing outflow of capital.  The government has championed the fact that it has hedged all of the country's expected oil production for 2015 at $76.50 per barrel, well above current market prices.  Those moves probably contributed to the peso's short-lived stabilization through most of January.  At the end of the month, however, it looks like traders were spooked anew by a report that U.S. economic growth in the fourth quarter was not as strong as anticipated.  They were probably also unsettled by a dovish policy statement from the central bank and the government's announcement that it would have to cut spending in 2015 and 2016.

Looking forward, I believe Mexican economic growth will continue to accelerate for a while yet, even as the government prudently dials back its recent fiscal stimulus efforts and works to keep its debt under control.  Nevertheless, there is a substantial risk that global investors will continue to overlook those positive fundamentals, especially if oil prices remain weak and the Federal Reserve really does hike U.S. interest rates in the coming months.  Sentiment is weighted to the downside for the peso.  Technical indicators confirm the downside risk.  The peso continues to trade below its key moving averages, and with its big decline at the end of January, it has fallen to an important support area.  In fact, that decline has left the currency at the neckline of a double top formation.  Momentum indicators suggest the peso is not yet oversold, so if it falls through its current level, the downward move could be substantial.  The currency's next major support level is at approximately $0.0655 (15.27 pesos per dollar).  On any rally attempt, I see its next major resistance level is at approximately $0.0679 (14.73 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

U.S. Dollars Per Peso
Peso 1501

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