So far this year, the Mexican peso has soared against the dollar with a rise of close to 11%, reaching levels not seen for seven years…
This rapid escalation adds to the accumulated increase in the “super peso” since last year, driven by a greater flow of dollars into the country not only due to a growth in exports, remittances and foreign investment, but also because high interest rates act as a magnet for investors.
The peso is among a group of emerging economy currencies that have gone through a good cycle, such as the Chinese yuan or the Indian rupee, while the dollar has shown signs of weakness compared to a basket of strong currencies.
While there are many emerging currencies that can be attractive to investors in the foreign exchange market, the Mexican peso has a big advantage.
“It is the most liquid currency in Latin America,” says Gabriela Siller, director of Economic Analysis at Banco Base, speaking to BBC Mundo.
A liquid currency is one that can be easily bought and sold in the exchange markets, gives confidence to investors and is traded in large volumes.
The most liquid currency in the world is the US dollar. It has the highest buying and selling volume in international markets, a characteristic that has allowed it to maintain its dominant position.
At the other extreme, the least liquid currencies are those that are less desirable, such as those from countries with high inflation, where paper is worth less and less every day and most people want to get rid of them.
In Latin America we can mention the Venezuelan bolivar or the Argentinean peso.
Therefore, the fact that the Mexican peso is very liquid is a good sign. A liquid currency is more likely to appreciate than one that is not traded much in the markets because it is not sought after.
In this context, the Mexican peso is currently the most liquid currency in Latin America because it is bought and sold more than the rest of the region’s currencies, according to data from the Bank for International Settlements (BIS), an international organization that groups together the central banks of different countries.
The organization points out that the volume of transactions with Mexican pesos at a global level increased 3% in the last three years and that the currency is in 16th place in the list of the most traded currencies in the world.
There are several reasons for this good position. The first is that in Mexico the currency can rise and fall freely (known as a free-floating regime) and there is practically no intervention by the monetary authority.
The second is that the Mexican peso can be traded 24 hours a day, while other currencies, such as the Brazilian real, have time restrictions.
And the third is related to confidence. “Investors are reassured by the country’s macroeconomic stability and the reputation of the Bank of Mexico, which is autonomous from the government,” says Siller.
What is the reason for the peso’s rise against the dollar?
The “superpeso’s” bullish run against the dollar has been driven by many causes. Here are some of them:
Increased inflow of dollars into Mexico. This inflow is mainly due to an increase in exports to the United States, although it is also explained by a strong increase in foreign direct investment and a rise in remittances sent by Mexicans living in the U.S. to their families on the other side of the border.
Large difference in interest rates. The difference between Mexico’s interest rate (currently at 11.25%) and that of the United States (5.25%) is six percentage points, which attracts investors to obtain a higher return in the Mexican market.
A redistribution of money flows following the outbreak of the war in Ukraine. Those who invest in bonds, i.e. buy debt, have less preference for buying debt in Asia.
And the attractiveness of the Mexican peso’s liquidity for investors. That liquidity allows them to enter the market quickly to buy pesos and gives them the expectation that they can exit quickly in case they prefer other opportunities.
Will it continue to rise?
Some analysts argue that since interest rates in Mexico have reached a very high level, the Central Bank will most likely not raise them any further.
This may encourage some investors to go to other markets in search of higher returns.
From another perspective, estimates point to a slowdown in the growth rate of the U.S. economy in the coming months.
“An economic slowdown is coming in the United States,” Gonzalez points out.
If growth in the world’s leading economy slows down, that contraction directly affects Mexico and “may generate a certain depreciation of the Mexican peso,” he adds, probably starting in the second half of this year.
“It would not be a significant depreciation, but it will no longer continue to rise,” he notes.
Other experts like Siller project that if current conditions continue, “the peso still has room to appreciate,” but it all depends on how the U.S. economic slowdown goes.
If the slowdown is deeper than expected, then fewer dollars could flow into Mexico. And with fewer dollars in the market, its price rises.
In general, bad economic news in the U.S. increases investors’ risk aversion and invites them to seek shelter until the storm passes.
Thus, when the sky is full of clouds, large capitals prefer to exit emerging markets and protect themselves in more solid currencies.
San Miguel Times