Monday, June 24, 2024

Strength Of The Peso In The Times Of Uncertainty

Our currency has gained great ground against the dollar and is positioned among the currencies with the highest appreciation in the world in recent months.

Since its historical maximum, above 25 pesos to the dollar last March, and until today, the peso has registered a significant appreciation of 20 percent.

We consider that the above, although it is mainly due to external factors, it is important to mention internal fundamentals that have differentiated the Mexican peso from other emerging currencies.

This appreciation is surprising given the current context; First, in the midst of a major global economic depression, which accentuated the signs of a slowdown since the end of 2018 registered in Mexico.

Similarly, a notable lack of fiscal stimulus in the face of the Covid-19 pandemic and a marked uncertainty regarding the scope of this contingency.

The external factor that could explain the benefit in the exchange rate is based on a political event and future economic prospects; in the electoral context in the United States since the victory by candidate Joe Biden, which provoked a generalized appetite for risk, causing weakness in the dollar and strength in a basket of emerging currencies, especially in our country.

Along these lines, the question arises as to what could differentiate Mexico from other emerging nations that have not been as favored as Mexico, and the reason is that there are fundamentals that have helped to give strength to the peso, among which stand out:

Public finances
Although, in the face of the health crisis, the federal government did not carry out notable economic stimulus policies, the sign of fiscal discipline and macroeconomic balances through cautious public balance sheets have managed to generate a positive perception among foreign investors and rating agencies.

Based on the latest published GDP data, public debt as a percentage of GDP rose to 53% at the end of September 2020, a level that we consider adequate, especially in the context of a pandemic.

Central bank autonomy
Banco de México has been a vital agent for the appreciation of the peso and an important pillar for economic fundamentals. Through a prudent, timely and especially accommodative monetary policy, it has managed to counteract, as far as possible, the transfer of the effects of the current crisis to economic activity.

Although the monetary injection has been its main tool (without neglecting the rate differential with the US), it has also implemented measures to provide liquidity to the financial sector in addition to collaborating more actively with other central banks.

Business relationship with the US
During the third quarter of 2020, the balance in the Mexican trade balance registered an important surplus of 16.345 million dollars, a historically high level that is compared with the deficit presented in the same period of last year of 750 million dollars.

This is a reflection of the gradual reopening of US economic activity, in addition to the important fiscal and monetary stimuli carried out in Mexico’s main trading partner, which led exports to exceed the growth rate of exports by 17.3%. imports during 3Q20.

This commercial relationship directly affects Mexico’s income level and therefore its growth prospects, which represents an important fundamental that could give strength to the peso.

Much of the appreciation of the peso is associated with the weakness of the dollar generated by the increase in the appetite for risky assets and by the pronounced monetary expansion by the Fed.

It is worth mentioning that under a new administration in the US, headed by Joe Biden, it would reflect greater political and economic clarity towards Mexico. This would reduce the country risk, which showed considerable progress since the arrival of Trump, and with it a better environment for investment.

Abroad, a new global wave of Covid-19 that forces new confinement measures or a negative outlook in the US Congress that prevents the materialization of additional fiscal support proposed by Biden, are just some events that could cut the positive day observed. not only with the Mexican peso price but in all markets.

In the interior, and in the same sense, an incorrect execution of public policies that compromise fiscal stability and the Mexican macroeconomic framework, in addition to the leading role as a risk factor that Pemex has taken on, could reduce the strength of the peso.

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