MexECON Blog

Peso Review - July 2015

In July, the Mexican peso declined 2.4% against the U.S. dollar, closing the month at a spot-market value of $0.0621 (16.10 pesos per dollar).  The currency has now fallen in 10 of the last 11 months, leaving it down some 20.2% from its most recent high in June 2014.  In fact, the peso has set multiple record lows in recent months.  As has often happened in recent months, the currency stabilized during part of July, but then continued its inexorable slide throughout most of the last two weeks, before staging a strong rebound on the last trading day.

The peso's rebound at the very end of the month came as Banco de México and the Finance Ministry announced that they would boost the amount of dollars that they auction every day to support the currency.  At least through the end of September, they will sell $200 million for pesos each day, up from $52 million per day previously.  The authorities also announced that they will tolerate less volatility before selling an additional $200 million per day.  Under the new guidelines, they will sell the additional dollars on any day when the currency drops by 1.0%, compared with a required drop of 1.5% previously.

Comment:  Even though the Mexican economy is growing only a bit slower than its long-term average, and even though its budget deficit and debt levels are not too bad, investors continue drive the peso lower.  The biggest concern is that the Federal Reserve is likely to start hiking U.S. interest rates in the next few months, draining funds out of Mexico and many other countries around the world.  At the same time, Mexico's sliding oil production and low global oil prices pose a threat to the government's fiscal situation beginning next year.  Because the sliding peso could boost inflation going forward, Banco de México has already signaled that it will try to support the currency by raising Mexican interest rates as soon as U.S. rates go up.  The new program of direct currency-market interventions announced at the end of July shows that the policymakers think even more measures are necessary to put a floor under the peso.  The question is whether the various measures will be able to stop the continuing declines.

Looking forward, I suspect that the peso will continue to trend downward.  The new market interventions may stop the declines temporarily, or even touch off a short-term rally.  Nevertheless, as the U.S. rate hikes get closer, I believe that investors will redouble their efforts to prepare for the new world of rising U.S. rates, and that will drive the Mexican currency lower again.  Technical indicators also seem to be pointing downward.  All throughout the peso's recent slide, rallies have petered out before the currency could rise much above its 20-day and 50-day moving averages.  It is notable that the peso's rebound on July 31 seems to have petered out at the 20-day moving average.  It will be a bad sign indeed if the peso cannot sustain a rally above those key averages, but once again embarks on a series of lower highs and lower lows.  Momentum indicators suggest the peso is already oversold, but I doubt that will be enough to encourage a sustained rally in the near term.  On any rally attempt, the currency's next major resistance area is at approximately $0.0628 (15.92 pesos per dollar).  If the peso continues to fall, I would put its next major support area at approximately $0.0615 (16.25 pesos per dollar).

Patrick Fearon, CFA
Portfolio Manager

Peso 1507

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