MexECON Blog

Peso Review - March 2015

In March, the Mexican peso fell 2.1% against the U.S. dollar, closing the month at a spot-market value of $0.0655 (15.27 pesos per dollar).  That was more than enough to reverse the slight strengthening in the peso during February, and it marked the currency's sixth decrease in the last seven months.  The peso is now down some 15.7% from its most recent high last May.  The currency was volatile in February, falling precipitously during the first week.  At mid-month, the peso began a strong rebound that brought it back to its level at the end of February, but it gave back about half of that rebound by the end of the month.

Comment:  Like many asset classes, the peso continues to trade heavily based on investor expectations about U.S. interest rates and their relationship to other interest rates around the world.  In mid-March, for example, relatively soft economic data from the United States and news that Federal Reserve policymakers had downgraded their expectations for interest rates going forward convinced many observers that U.S. rates would be kept at their current record lows longer than previously thought.  The dollar softened, and many other currencies strengthened in response.  That was probably the main reason for the peso's rebound in the middle of the month.  It apparently offered even more support than Mexico's decent economic fundamentals, the government's plan for further spending cuts to deal with low oil prices, and the central bank's launch of a second dollar-selling program to support the peso.

Looking forward, I expect the peso will continue to reflect expectations for U.S. interest rates.  Investors now seem to expect the first U.S. rate hike to come at the end of summer, rather than at the beginning, but the key point is that the rate hike is still coming.  That knowledge will keep putting downward pressure on the peso.  Banco de México Governor Agustín Carstens has signaled that Mexican interest rates may be raised in response.  According to Carstens, they could even be raised before the Federal Reserve makes its move.  Nevertheless, there is still a great likelihood that the peso will continue to soften until the U.S. rate hike happens.  Technical indicators for the peso, which are currently neutral, offer little hope for any sustained upward move.  The peso's next major support level is at approximately $0.0640 (15.63 pesos per dollar).  On any rally attempt, the currency's next major resistance area is at approximately $0.0670 (14.93 pesos per dollar).

Patrick Fearon, CFA
Portfolio Manager

Peso 1503

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