The Mexican Peso
Foreign Fluency in Currency
Most economists agree that the majority of world currencies began their fall against the US Dollar on or around June 1st 2014. At that time, the main reason provided for these drops in currency values against the dollar was the internationally depressed price of oil….which ultimately bottomed out in February 2015. In many ways, crude oil prices have become the new “gold standard,” for international trade.
With oil devalued, oil producing countries faced budget imbalances that they were not prepared to endure. Russia and Brazil had drops in the value of their currencies in excess of 60% and many Middle Eastern countries found themselves at the mercy of European banks to meet their financial obligations. Mexico, being an oil producing country, also took the hit and by February of 2015 the Peso crested 19:1 against the US Dollar.
Don’t forget that the Peso has always been considered weak against the Dollar. However, it was when oil began its downward spiral that the Peso took its hardest hits of the decade. Then came the Brexit vote. Many economists believe that the “second” fall of the Peso was based on the market instability caused by the British vote to leave the European Union. While Brexit had nothing to do with Mexico, it still left investors rushing for the protection of US Dollar currency, thus resulting in yet another rise of the Dollar against the Peso.
A Weak Peso is not Always Bad……for Mexico
With the rise of the US Dollar against the Peso, Mexico has enjoyed a surge in exports to the US. One of the bright spots for this currency differential for our neighbors to the South is that products manufactured or grown in Mexico are highly sought after by US consumers due to the economical costs associated with them.
To many economists, why Mexico is taking such a hit on their currency doesn’t make much sense, as Mexico will enjoy 4% GNP growth in 2016…..nearly double that of the US. In an odd way, the fall of the Peso has stimulated economic growth by lowering the cost of Mexican produced products sold in the world’s largest consumer nation, the United States. It is true that many other economic variables help to value a currency but GNP is considered a benchmark qualifier for currency valuation.
Quite frankly, one of the open “secrets,” regarding Mexico’s appeal to international manufacturers is the value of its currency that translates into lower employment costs, material costs and logistical expenses. It is a fact that no manufacturing companies located in Mexico are moving to the US for many of the same reasons they are moving to Mexico. There is a renaissance of manufacturing growth and service development taking place in Mexico today. Therefore, the more cynical among us could say that the weak Peso is actually a good thing for Mexico at this time. It is the current value of the Peso that allows Mexico to compete with China on many levels.
Is the Peso Poised for a Rebound?
The Peso will likely remain weak against the Dollar through the middle of November. Administration changes tend to create nervous markets and we are now less than a month away from knowing the direction a new incoming Administration will take. While many believe that a Democrat in the White House will help to stabilize the Peso, and a Republican win would further undercut the currency valuations…..there are other more calculated assessments that believe that once a Republican Presidency settled in, it would be more likely that both Mexico and the US would develop a more effective working relationship, thus potentially strengthening the Peso.
The bottom line is that while the Peso may be weaker than ever against the US Dollar, many economists believe they are lucky the situation is under better control than compared to other Latin American countries. As the Mexican economy is reliant upon purchases from the US as well as their trading partners in China….. both with the deceleration of the Chinese economy and the less than robust US economy not purchasing as many products from South of the Border, that leaves only the oil production of their country to support its economy.
Most orthodox economists believe that the Mexican economy still appears relatively stable compared to others in the region. Most major oil producing countries have slipped into recession with high inflation and in some cases hyper-inflation. In Mexico, growth is sluggish, but not negative……and inflation appears to be under control as well. Time will only tell, but it is expected that unless something catastrophic happens either internally in Mexico or on a Global scale, the Peso may not sink much lower than it currently is. Only time will tell, but many economists and currency specialists are hopeful the worst may be behind the fall of the Peso!