MexECON Blog

Peso Review - February 2015

In February, the Mexican peso was little changed against the U.S. dollar, rising 0.3% and closing the month at a spot-market value of $0.0669 (14.95 pesos per dollar).  That followed five straight months of declines, which had helped push the currency down 14.2% from its most recent high last May.  Nevertheless, in spite of the slight rise during February, the currency spent much of the month under water, including two sharp, short-lived declines in the early and late parts of the month that many traders took as confirmation of the downside risk in the peso and other emerging-market currencies.

Comment:  Mexico's economic fundamentals are still relatively positive.  For example, exports have been on an uptrend, while commercial and residential investment have been in recovery and falling unemployment raises the prospect of stronger consumer spending.  Government fiscal policy has become somewhat looser, but the government has hedged all of the country's expected oil production for 2015 at $76.50 per barrel, limiting the revenue hit from the recent slide in global petroleum prices.  Government debt remains modest.  Just as important, the Ministry of Finance and Banco de México late last year reactivated a program of dollar auctions on any day when the peso drops 1.5% or more, and the central bank has signaled that it is willing to hike interest rates in the event that rising rates in the United States spark an outflow of capital.  Nevertheless, it seems that investors are still focused on the government's heavy reliance on oil revenues for much of its budget, which could cause fiscal problems down the road if oil prices remain low.  Moreover, it is not clear how well the peso can hold up when U.S. interest rates start rising, even if Banco de México raises its own rates.

Looking forward, I suspect that Mexico's good economic fundamentals will help limit the downside for the peso, and they could even help spark a temporary rebound at some point.  However, the balance of risks for the currency is still weighted toward the downside.  For the foreseeable future, the peso is likely to remain weak.  Technical indicators also seem to point toward a moderate downside risk.  The peso continues to trade below its 50-day moving average, though the most recent action has bunched up around the 20-day moving average, and momentum indicators are rather inconclusive.  The currency's next major support level is at approximately $0.0661 (15.13 pesos per dollar).  On any rally attempt, its next major resistance area is at approximately $0.0681 (14.68 pesos per dollar).

Patrick Fearon, CFA
Vice President, Fund Management

Peso 1502

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