The unsuspected strength of "superweight" Mexican: how it is becoming an increasingly attractive investment

These are good times for the Mexican peso. The country’s currency has started 2023 strongly, reaching price levels against the dollar that were not seen for several years and leaves behind, in the rearview mirror, the severe blow he received with Donald Trump in the White House. The drift of his appreciation speaks for itself: if in 2020 it was sold to 25.12 per dollarthis Friday it already marked 18.1.

What are the causes? And what does it mean?

What does the data say? Taking a look at the exchange rate against the US dollar or the euro helps to understand its good drift in recent months. In 2020, with the reins of the United States in the hands of Donald Trump and a context marked by the threat of tariffs and the renegotiation of FTAthe exchange rate with the dollar came to be around 25 pesos. In April of that same year, one euro was exchanged for more than 27 pesos.

The situation is different today: after a more or less decreasing curve, with slight oscillations, the exchange rate with the dollar is around 18.1 and the euro 19.2.

The Mexican peso is the second most appreciated currency in the year, due to 1) flows of dollars that arrive from abroad through exports, remittances and direct foreign investment and 2) monetary policy of the Bank of Mexico that maintains a wide rate differential with respect to USA. pic.twitter.com/vL092JGRtb

— Gabriela Siller Pagaza (@GabySillerP) February 13, 2023

The best of the emerging. Bloomberg data show that last month the Mexican peso accumulated an appreciation of 2.92% against the dollar and positioned itself as the currency with the best performance of 23 emerging countries. Its evolution easily exceeds the rest, but it is not the only one that moved in positive percentages: the Peruvian sol registered 1.38% and the Hungarian forint 0.66%. The list closes it, with a very different trend, the South Korean won (-6.89%). Within Latin America, the Brazilian real (-3.07%) or the Chilean (-3.57%), Colombian (-3.94%) and Argentine (-5.15%) peso did not show a good result either.

He last year The currency had already achieved a good performance, the best in fact since 2012. At the gates of the new year it marked 19.51 units per dollar with an appreciation compared to the end of 2021 of 4.87%. That value already placed it as the currency with the best performance against the dollar in comparison with those of other emerging economies. It was followed by the Brazilian real, with 5.24%; the Peruvian sol, with 4.455%; the Russian ruble, with 3.96%; and the Singapore dollar (0.21%).

And what is the reason? Reasons, plural. Its good performance in recent months can be explained by several reasons, as detailed The country: remittances sent by Mexicans from abroad, the reactivation of tourism after the pandemic, exports to the US or the attractive yield on its market debt. There may also be other factors, such as the price of oil.

One of the key factors, however, is the policy applied by the Bank of Mexico (Banxico), which has increased the target interest rate, taken as a reference by financial institutions and which reinforces the attractiveness to invest in pesos. In February the interest rate stood at 11%which reverts to the attractiveness of Mexican debt bonds compared to the rate of USA either Europe.

From the peso to the Mexican “superpeso”. The appreciation of the Mexican peso has already led some to speak on networks and in the media of the “super peso”. In the country itself there are also voices, however, that advise being cautious with the readings and extrapolations and remember that not all the factors that explain the drift of the currency are related to the health of the country’s economy.

“It is an obsession to measure the strength of the economy with the exchange rate,” reflect on The country Jorge Sánchez Tello, Director of Applied Research at the fundefFundación de Estudios Financieros: “The peso has appreciated due to different factors such as remittances, the dollar weakening and the increase in interest rates”. Some actually point to a weakness of the US dollar, rather than to the strength of the peso. The “super peso” also has less desirable effects, such as its impact on exports. today, the truth is that his good run has already defied the odds of those who predicted a depreciation.

Cover image: Steve Johnson (Unsplash)