Mexican peso: myths and reality of one of the most stable currencies of the moment | economy

A customer pays for fruit with a 100-peso bill at a stand in Central de Abastos, Mexico City.
A customer pays for fruit with a 100-peso bill at a stand in Central de Abastos, Mexico City.Susana Gonzalez (Bloomberg)

Bets against it have been piling up and its weakness has been predicted, but the Mexican peso is holding steady amid major falls in global stock markets. For many in Mexico, its performance has to do with the government’s macroeconomic policies, but what really drives the peso? And, perhaps more urgently, will the predictions come true?

The peso is not like other currencies of developing countries. The second most liquid of emerging currencies after the Chinese renminbi (or yuan), the Mexican peso is very easy to buy and sell on global financial markets 24 hours a day, five days a week. This made it a favorite of operators, or merchants, who want to bet for or against developing countries around the world. That is, it is used as assigneeso if an investor is optimistic about another emerging market, say Turkey, he would buy Mexican pesos as an investment if he can’t buy liras.

This makes it a very sensitive currency, and that is by design. Traumatic devaluations in the 1980s and 1990s embedded the exchange rate in the Mexican psyche and created a belief among authorities that the currency should float freely. In this way, the currency would be the first channel for absorbing economic shocks, both external and internal. That is why when global events take place, such as the so-called Brexit in Great Britain or the war in Ukraine, the peso is one of the first world currencies to react.

For years, Wall Street investment banks have predicted that the Mexican peso would be the emerging currency that would appreciate the most, and each year the peso has disappointed. This was particularly evident during the previous Federal Administration, which promoted the opening of the economy to foreign capital as a “Mexican moment”. Things are very different today. Globalization is in clear decline, the government of Andrés Manuel López Obrador has closed the energy sector to private parties, and, while the depreciation of the Mexican peso is predicted, it has risen more than 7% from its lowest price in this period of years.

Mexico has seen a strong inflow of dollars into its economy through exports, remittances and foreign direct investment, which explains its stability amid the current global financial turmoil, says Gabriela Siller, director of economic analysis at Basic Bank. In addition, the increase in the benchmark interest rate charged by the Bank of Mexico creates an attractive return compared to the US, so investors continue to buy Mexican assets.

The stability of the peso “has nothing to do with Mexico’s economic fundamentals,” Siller points out, “even the initiatives and reforms that the administration has implemented create more uncertainty and that adds a little instability to the Mexican peso. If these initiatives and reforms had not happened, if there had not been an aversion to risk in the Mexican economy, I believe we could easily see exchange rates near 19.50 to the dollar.” The price on Friday is 19.83.

The events of the last few months support Siller’s thesis. In July, the United States launched a formal process against López Obrador’s energy policies, putting at risk a free trade agreement that has boosted Mexican exports for decades. In the worst case scenario, the US could impose tariffs on Mexico, creating billions of dollars in losses for entire sectors of the economy. But that announcement did not move the exchange rate.

The peso did not react even three weeks ago, when the official in charge of these processes, Tatiana Clouthier, resigned. Not even this week, when Raquel Buenrostro, who replaced Clouthier as secretary of the economy, asked for the resignation of directors and technicians who remember and know foreign trade. In other emerging countries, these events would, under these conditions, cause the exchange rate to move, but in the case of the Mexican peso, this is not the case.

Until a month ago, operators on the largest futures market in the world, the Chicago Mercantile Exchange (CME), had bet for 11 consecutive weeks on the depreciation of the Mexican peso. “For a while these speculative movements had a significant impact on the value of the Mexican peso,” says Siller, “but now that impact is no longer visible.” In addition, on October 20, a Moody’s Analytics report predicted that the peso could depreciate by up to 20% against the dollar if the US enters a recession, causing jitters.

“I don’t share that view because exports are growing strongly, remittances are also continuing to grow,” says Siller, “if the United States slows down or falls into a mild recession, that will imply a depreciation, but a moderate one, of the Mexican peso. It may depreciate to 20.30 per dollar on at the end of the year, and next year trade at an average of 20.77 in. That would represent a decline of between 2% and 5%.

Luis Gonzali, market strategist at Franklin Templeton, says he is skeptical of the exchange rate forecast. In reality, the mathematician claims, the exchange rate “can change many times in a counter-intuitive way to what is happening in the economy and, in the short term, it is a random variable that moves with the same probability up as down”.

Historically, inflation in Mexico tends to be higher than in the US, which means that over the long term, the peso tends to depreciate against the dollar. “So it’s not unreasonable to say that we could see depreciation going forward,” says Gonzali. But the current moment is “a very special episode,” says Gonzali. Never before has so much money been injected into the economy as was done in the US and Europe during the covid-19 pandemic. In addition, an unpredictable factor, such as the Russian offensive in Ukraine, directly affects the exchange rate.

Markets are, deep down, emotional, and the Mexican peso is one of the most sensitive. “Ultimately, economic models are based on the assumption that eventually the variables or the economic system will come to equilibrium. But that balance is a dream. We never get that balance, we’re always out,” says Gonzali. “The exchange rate is one of the most complex variables for forecasting because it is the first to absorb all shocks, expectations, fears, euphoria. To predict its level would be to predict how people will feel tomorrow.”

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