MexECON Blog

Peso Review - May 2015

In May, the Mexican peso fell 0.3% against the U.S. dollar, closing the month at a spot-market value of $0.0649 (15.41 pesos per dollar).  That followed declines of 0.6% in April and 2.1% in March, and it marked the currency's eighth decline in the last nine months.  The currency is now down 16.2% from its most recent high exactly one year earlier.  The peso actually trended upward through the first half of May, but it gave up all those gains and more during the second half of the month.

Comment:  Although Mexican economic fundamentals are rather lackluster at the moment, the economy is still growing, and there are some indications that growth could strengthen going forward.  Therefore, it is clear that the continued downward pressure on the peso comes mostly from the threat of higher U.S. interest rates in the months ahead.  The likelihood of higher U.S. rates is also having a negative impact on a number of other asset categories, such as bonds and real-estate investment trusts.  Other headwinds for the peso include the country's sliding oil output, low oil prices, and the latest brinksmanship regarding Greece's bailout program.

Looking forward, I believe those headwinds will continue to put downward pressure on the peso.  The downward pressure may be mitigated by better-than-expected economic indicators in the United States and Mexico, and by the Mexican government's proactive policies, such as the Peña Nieto administration's recent budget cuts in response to lower oil prices, Banco de México's multiple dollar-selling programs to support the currency, and the central bank's promise to raise Mexican interest rates if necessary in response to higher U.S. rates.  Nevertheless, the downward pressure will continue to predominate.  Technical indicators suggest the peso may be somewhat oversold, but I don't think that will allow for a sustained rebound.  On any rally attempt, the currency's next major resistance area is at approximately $0.0655 (15.27 pesos per dollar).  If it continues to fall, its next major support area is at approximately $0.0635 (15.75 pesos per dollar).

Patrick Fearon, CFA
Portfolio Manager

Peso 1505

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