( Spanish) — The Mexican peso is giving something to talk about, as it is currently in its best shape against the dollar in almost two years. They even call it the “superweight.”
This Tuesday, the peso had its lowest level of the day at 19.08 units per dollar, which was the best position that the Mexican currency has had in a month, the team of analysts of the trading platform said in a statement. OctaFX.
But the appreciation did not end there: this Wednesday, the peso managed to reach 18.90 units per dollar, “something not seen since February 24, 2020, that is, before the coronavirus was declared a pandemic,” he commented. Gabriela Siller, director of Economic Analysis of the financial institution Banco Base, in an interview with .
The figure, which represents good news for importers, is not positive for those who send remittances from the United States to Mexico, as well as for exporters.
What is the reason for the appreciation of the peso against the dollar?
Turn to see the context of the dollar
Siller said that, on the one hand, we have to observe the current weakness of the dollarsince its poor performance positively affects the level of the peso and that of more emerging currencies in the world.
“The dollar is weakening. It is evident how most of the main crosses win against the dollar,” he commented, adding that this weakness is part of the context of high inflation in the US.
However, the specialist added that the market anticipates that United States inflation in December —data published this Thursday— lower and with it the nervousness of investors in the US economy will also decrease, since “the Federal Reserve (Fed) will no longer have to be so aggressive in increasing interest rates.”
Therefore, if inflation is declining in the US and interest rate increases are not so aggressive in the future, investors would turn more towards the US economy and the dollar would strengthen because its demand would increase. (In a nutshell and as an example, if you don’t charge me a lot of interest, I as an investor lean towards the US dollar, which makes this currency more in demand and therefore increases its value).
Only time will tell us if this scenario is fulfilled. Meanwhile, the dollar is weak and the peso is strong. Does it have something to do with the Mexican economy or does it all come from abroad? Actually, both issues are related.
Other factors that affect weight
external
Although Siller highlighted that the appreciation of the Mexican currency is due in large part to the weakness of the dollar, he mentioned other factors that are helping the peso, including the following that come from outside the country:
- The flows in dollars that continue to arrive in Mexico for exports
- The constant arrival of remittances
- The arrival of foreign direct investment to the country
However, the analyst pointed out that “since an economic slowdown is expected in the United States, it is to be expected that these flows (investment, exports and remittances) will also slow down, so we could see a rebound in the exchange rate towards the second trimester.
If this context of economic slowdown in the US occurs and dollar flows to Mexico drop, the peso would lose strength and rebound to 19.40 or 19.50 units per dollar in the second quarter of 2023, according to Siller.
Despite this, OctaFX noted that “the strength of the Mexican peso is likely to remain intact as long as it trades below 19.50 units.”
internal
Regarding internal factors, the director of Financial Analysis of Banco Base explained that the Gross Domestic Product of Mexico has not yet recovered to reach 2018 levels and the labor market has not yet reached an optimal level (although it already reached levels before of covid-19), so the strength of the peso cannot be attributed to the Mexican economy.
However, “what is being reflected in the exchange rate (in favor of the peso against the dollar) is the balance in public finances (of Mexico). Although internally, public spending has not been exercised in the more efficient, the fact that there is no significant indebtedness has helped, because the probability of the government defaulting is lower.
In addition to the country’s healthy public finances, Siller added that the Mexican peso is also being strengthened by the “restrictive monetary policy” of the Bank of Mexico, which, by following in the footsteps of the US Fed regarding increases in The interest rate in the face of high inflation has kept the peso strong against the dollar.
“If the Bank of Mexico disassociates itself from the Fed’s monetary policy and that is added to the economic slowdown in the United States that causes less dollar flows to Mexico, then we could see greater depreciations there, towards levels above 20, 50 per dollar, but that is already a different scenario. Until now, we believe that the Bank of Mexico will follow the path of the Federal Reserve in this year’s increases,” he concluded.
