2023-07-14 13:36:24
The Mexican peso has undoubtedly been the big surprise of the year, since it has hit practically all the estimates. At the end of last year, the Citibanamex survey of economists showed that the consensus of economic analysts anticipated that the Mexican peso would reach 20.75 pesos per dollar at the end of 2023. Today, said estimate is at 18.30 pesos per dollar and, given the current currency strength, everything seems to indicate that we could continue to see downward revisions.
In the second week of July, the Mexican peso reached 16.85 pesos per dollar, its best level since 2015. This appreciation was largely attributed to the weakening of the US dollar, caused by the most recent inflation data in the United States and hope that the Fed has already concluded its cycle of interest rate hikes. However, there are other factors that have contributed to the strength of the Mexican currency, especially against other emerging currencies. Among the many factors, we highlight:
* Carry trade attractive. Carry trade refers to an investment strategy in which the investor sells one currency at a low interest rate and invests his earnings in another, higher-yielding currency at a higher interest rate. Specifically, the interest rate differential between Banco de México (11.25%) and the Federal Reserve (5.25%) -which today is 600 nominal base points and around 400 real base points- has resulted in an attractive carry tradewhich has contributed to strengthening the Mexican peso.
* stable fiscal position. Despite slight deviations from fiscal targets, the federal government has maintained a prudent fiscal policy, which has improved the country’s position vis-à-vis its peers. In 2022, public debt as a percentage of GDP was 49.4% and it is expected that this year it will rise to 49.9%. In this context, Fitch Ratings recently reaffirmed the “BBB-” rating for Mexico’s debt and maintained the stable outlook. According to the rating agency, the ratification is based on sound macroeconomic policy and the good situation of the national external accounts. In addition, the sound fiscal policy prevailing in the moderate deficit and the stability of the debt relative to GDP also support the rating.
* Manageable current account deficit. Mexico’s current account deficit remains at levels that can be financed with foreign direct investment. Specifically, while the current account deficit was 14 thousand 282 million dollars in the first quarter of the year, direct foreign investment amounted to 18 thousand 636 million dollars in the same period.
* Solid income from remittances. Remittance flows arriving in Mexico have been robust, which has contributed to the stability of the national currency. In fact, in May, remittances recorded a record of 5.7 billion dollars, while the cumulative figure for twelve months reached 60.8 billion dollars.
* Positive Nearshoring Trends. Mexico has established itself as an important manufacturing assembly center, which has encouraged non-oil exports and imports. This positive push that nearshoring has brought has also benefited the currency.
The million dollar question remains how long the “superweight” will last. It’s hard to tell; however, it is a fact that there are challenges that could impact the performance of the coin in the future. I highlight the main ones:
* decrease in carry trade in the coming months. As I mentioned, the rate differential between the Bank of Mexico and the Fed is currently at all-time highs; however, while Banxico has already reached a maximum rate level and could begin a cycle of cuts this year, the Federal Reserve has left the door open for more increases in the short term. For this reason, the current differential (600 basis points) could begin to decrease in the coming months, which would reduce support for the Mexican peso.
* Vulnerability to economic slowdown in the United States. The close economic relationship between Mexico and the United States makes the peso susceptible to any economic slowdown in its northern neighbor.
* Presidential elections and political landscape. As Mexico prepares for the upcoming presidential elections, political uncertainty could affect the stability of the national currency. Although the ruling party leads the electoral preferences, there is still no certainty about who will occupy a place on the ballot next year or about its economic proposals. Likewise, the composition of Congress will be at stake in 2024, and the result will be crucial for the balance of the next administration. In addition, we must not forget that the United States will also hold presidential elections in 2024. It is enough to remember the “Trump impact” on the peso to know that our currency is also sensitive to this process.
Thus, it is likely that the national currency will continue to show strength in comparison with other emerging currencies; however, and although it may seem like a litany, there is still a slight depreciation trend on the horizon. Therefore, I have no doubt that the Mexican peso will continue to give people something to talk about.
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