The Intricate Dance of the US Dollar and the Mexican Peso

The Intricate Dance of the US Dollar and the Mexican Peso

Steady Appreciation of the Mexican Peso

On the 24th of September, 2023, the US dollar experienced a slight boost, opening at 17.21 Mexican pesos. This increase placed the US dollar fourth among the emerging market currencies that have depreciated most significantly against the dollar. Despite the dollar’s recent performance, the Mexican peso has enjoyed consistent appreciation since mid-2020, making it one of the strongest currencies among emerging markets over the last three years.

According to Janneth Quiroz Zamora, the Director of Economic, Exchange, and Stock Market Analysis at Grupo Financiero Monex, this consistent appreciation can be attributed to positive reports on economic activity and inflation in Mexico. The Global Indicator of Economic Activity (IGAE) reached a historical high, while both general and underlying inflation rates were lower than anticipated. However, the forecast remained that the reference interest rate would stay unchanged for the rest of the year.

Exchange Rates in Major Mexican Banks

On the said date, the buying rates for the US dollar in some of the major Mexican banks were as follows: Banco Azteca at 16.50 pesos, BBVA at 16.31 pesos, Banorte at 15.95 pesos, Santander at 16.05 pesos, and Banamex at 16.65 pesos. Notably, the selling rates were not provided.

Factors Influencing the Peso’s Strength

Several factors have contributed to the Mexican peso’s upward trajectory. One of the main arguments is the rate spread between Banxico (Banco de México) and the US Federal Reserve’s key rates, which currently stands at 575 basis points. This disparity is cementing investors’ appetite for peso-denominated assets. Furthermore, due to the Mexican economy’s strong ties to the United States, the value of the peso is particularly tethered to macroeconomic indicators north of the border, including benchmark interest rates.

Remittances sent by workers, mainly from the United States, have also played a significant role in strengthening the Mexican peso. According to BBVA Research, remittances rose for 38 consecutive months through June 2023, closing the first half of the year at 30.2 billion dollars, an increase of 9.9% from the same period in 2022.

Implications of the Nearshoring Boom

The ongoing global pandemic has also influenced the Mexican economy. A significant number of multinational companies have relocated their manufacturing plants from China to Mexico, a trend known as nearshoring. This shift has attracted considerable attention from investors due to Mexico’s geographical proximity to the US, which implies high potential savings in terms of transportation and labor costs.

The Peso’s Tango with the US Dollar

The performance of the Mexican peso is intricately tied to the US dollar. When the US dollar weakens, the peso strengthens, implying an inverse relationship. One significant factor to consider in this relationship is the US Federal Reserve’s interest rate path as it deals with inflationary pressures. The value of the Mexican peso hinges on the interest rate spread between the Bank of Mexico and the Federal Reserve, which currently stands at 600 basis points.

Looking Ahead

Despite the Mexican peso’s current strength, some economists predict a potential depreciation towards the end of the year. Future economic activities and geopolitical events will play a crucial role in shaping this trend. Regardless, the intricate dance between the US dollar and the Mexican peso continues, underlining the complex interplay of global economic forces.