A customer waits for a vendor at a fruit stand in Mexico City on May 9, 2023.Toya Sarno Jordan (Bloomberg)
The Mexican peso was crowned again this week. Amid uncertainty surrounding the US debt ceiling discussion, the Latin American currency appreciated to 17.42 units per dollar, its highest level since May 2016. By breaching this new barrier, the peso tops the list of best-performing emerging market currencies on development so far this year, an inertia that began in mid-2022. Although it depreciated slightly to 17.75 units per dollar after hitting this new floor, the forecasts are still favorable for the currency, which will depreciate as much as 25 pesos per US currency in 2020. The most important question to answer , is how long parity in favor of the peso will be maintained. The signs of a closer convergence are to be found on the other side of the border, analysts say, in US monetary policy and economic output decisions.
Forecasts for the financial quarters still call for a weaker dollar as the debt ceiling discussion remains uncertain and the US Federal Reserve signals it will halt interest rate hikes in a range of 5% to 5.25%. Despite the fact that rate hikes have halted, the spread with Mexico’s interest rate – which stands at 11.25% – will remain wide, a gap that will benefit the Latin American country. In addition to the restrictive policies of the Banco de México, the flows of dollars entering the country through exports, foreign direct investments and remittances also contributed to this good parity development – the country recorded an unprecedented amount in 2022 : more than 58,000 million dollars – as well as healthy Public finances, without worrying debt and political stability compared to other emerging markets.
“Yes, it was surprising that the peso was below 18 pesos per dollar, because that was against all expectations,” admits Gabriela Siller, director of analysis at Banco Base. The specialist attributes the appreciation of the Mexican peso to the increase in the flow of dollars from abroad via exports, remittances and foreign investments, as well as to the international preference of investors for pesos as a means of investment: “This happens when there is no fear, and then they let the Dollars fall and take other assets with a better performance perspective. “The peso is the most liquid currency in all of Latin America, there are no opening or exit times and this gives investors the confidence that they can get in or out at any time,” he says.
Siller even reiterates that there is still room for further appreciation towards the 17.20 pesos per dollar level. However, he warns that a floor above this exchange rate would be very unlikely due to a likely recession in the United States, a scenario that would slow export and remittance flows into Mexican territory and increase risk aversion, which is currently not permeating among investors.
For now, the magnitude of the weight has again raised the question of whether or not the so-called superweight is expedient. On the positive side, a strong local currency helps drive down the prices of imported items, thereby curbing inflation. “The best thing for any country is to help the consumer, and then if you import cheaper and encourage inflation, there could be a positive bias.” Because we import a lot to produce locally, that helps you, the to improve prices. Additionally, converting foreign debt into pesos is undoubtedly cheaper, in that sense it has helped the public sector a bit too,” claims James Salazar, associate director of economic analysis at CIBanco.
César Salazar, a researcher at UNAM’s Economic Research Institute, points out that a relatively appreciating exchange rate is better for the Mexican economy. “Typically, periods of economic expansion in Mexico have coincided with periods of exchange rate appreciation, which in principle is nothing negative, but in truth, as we cross more and more speed bumps, it could lead to an appreciation of eventually competitiveness problems.” Strong appreciation makes us less competitive abroad and that can affect workers’ wages,” he notes.
However, the exchange rate at these levels also implies a losing record. Carlos Serrano, chief economist at BBVA Mexico, explains that the price of the peso hitting these levels could mean headwinds for sectors such as exporters, tourism and people who receive remittances. In this vein, José Abugaber, president of the Confederation of Mexican Chambers of Commerce (Concamin), recently warned that industries such as textiles, footwear and electronics are being hurt by rising export costs, a factor that is also limiting the country’s competitiveness. “These are industries that need to sell and promote, and if I come back with a customer to raise prices, they will leave us and go to China,” the businessman said.
At BBVA México, the forecast is for the currency to close between 18 and 18.5 pesos, while Banco Base forecasts the exchange rate to be at 18.10 units per dollar by the end of 2023.
The outlook for the Mexican currency remains encouraging. Even with the peso’s slight depreciation expected for the last half of this year, experts agree that the currency will still maintain strength against the dollar in 2023, below 19 units, a good level compared to the Prices of three years ago, a dollar was exchanged for a maximum of 25 pesos.
Subscribe here Subscribe to the EL PAÍS México newsletter and receive all the important information about current events in this country