Mexico: Mexican peso's uninterrupted downward trend against greenback continues
July 10, 2015
Heading into the third quarter, the peso continues to weaken. It has been sliding since the middle of last year when it fluctuated around 13.0 MXN per USD and, at the end of June, the Mexican currency traded at 15.3 MXN per USD. This was 2.0% weaker than the trading value seen at the end of May. However, an annual comparison shows that the Mexican peso has lost 20% of its value against the U.S. dollar, making this one of this year’s the worst performances in emerging market currencies. Moreover, the peso continued to slide in recent days, trading at 15.8 MXN per USD on 9 July.
The persistent weakening of the Mexican currency since the second half of 2014 has been in reaction to the fall in oil prices and also due to the markets’ view that the U.S. Federal Reserve (Fed) was going to increase interest rates. In fact, a combination of factors have exacerbated the fall in the Mexican peso in recent weeks. Among these factors are the proximity of the increase in the Fed’s federal funds rate—which is expected to occur at the end of this year—and market turbulence caused by the Greek debt crisis. The markets are also taking into account the possibility of a nuclear deal with Iran. This could lift the economic sanctions on the country which would, in turn, allow it to return producing oil. That, as a result, would add further downward pressure on global oil prices and, consequently, on the Mexican peso.
However, it is still premature to say for certain that the value of the peso will continue falling. The median prediction of analysts polled by LatinFocus found that the peso will end 2015 at 15.3 MXN per USD and that it will strengthen further by the end of 2016; the peso is expected to end the year at 15.1 MXN per USD.
Commenting on a press note about the strengthening of Mexico’s currency going forward, Benito Berber, Senior Latam Strategist at Nomura, pointed out that he sees the peso trading at between 15.0 and 15.6 MXN per USD this year. According to Berber, the peso has weakened temporarily as the Greek crisis has been transmitted to Mexico via declining share prices in the U.S. market. However, Berber expects the currency to recover in the coming months mainly because the economy will start to reap the benefits of the Mexican government’s reform program, in particular from the auction of 14 oil and gas blocks that is scheduled for 15 July.
Author: Ricardo Aceves, Senior Economist