Mexico: Mexican peso suffers major hit in August, weak currency is here to stay
August 6, 2015
The Mexican peso’s recent woes began in mid-2014 when the value started to drop in line with the gradual decline in global oil prices. It was with the collapse of oil prices at the end of 2014 when the peso reached 14.7 MXN per USD, losing 13% of its value against the greenback in annual terms. The downward trajectory that began in the second half of 2014 persisted with strong volatility through the first half of 2015 and was exacerbated at the beginning of the second half of the year.
Another episode of strong volatility reappeared at the outset of H2 2015 and, at the end of July, the Mexican peso broke the 16.0 MXN per USD psychological barrier for the first time since 1993. Moreover, despite Mexican monetary authorities’ efforts to support the currency, the peso weakened further against the dollar and, on 25 August, the currency closed the trading day at 17.2 MXN per USD, which represented a new all-time low. The sharp drop in August was primarily a response to the interest rate cut in China amid rising fears regarding the effects that a slowdown in China could have on the global economy and ultimately on demand for commodities. Although the peso has recovered some of the ground lost in recent days, the MXN remains stubbornly low. On 31 August, the peso traded 16.8 MXN per USD, which was 4.0% weaker than the level recorded on the same day of the previous month. In fact, in annual terms the MXN lost 28.0% of its value against the U.S. dollar at the end of August.
Fluctuations of the Mexican peso are largely driven by the price of oil, which is Mexico’s main commodity export and the fall in oil prices has not been declared over. Should the price of oil remain low throughout the remainder of 2015, a weak Mexican peso is here to stay. Moreover, high turbulence in global financial markets as well as the proximity of the Fed hiking the interest rate—analysts are divided on whether this will take place in September or in December—are likely to increase the risks of capital repatriation from emerging markets to developed ones. The depreciation of the peso could be exacerbated once the U.S. treasury yield curve reacts to the Fed’s rate hike.
Author: Ricardo Aceves, Senior Economist