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The myth of the 'superpeso' and the changing stability of the Mexican currency

2023-02-03T10:49:04.001Z


The currency reached levels not seen since October 2018, trading below 19 pesos per dollar The Mexican peso had not seen an appreciation like the one in recent weeks. This Thursday, the spot exchange rate stood at 18.5418 units per dollar, reaching levels not seen since October 2018. This phenomenon has led both users on social networks and the media to refer to the Mexican currency as "superpeso". . The exchange rate is defined simply as the value of one currency against another, in t


The Mexican peso had not seen an appreciation like the one in recent weeks.

This Thursday, the spot exchange rate stood at 18.5418 units per dollar, reaching levels not seen since October 2018. This phenomenon has led both users on social networks and the media to refer to the Mexican currency as "superpeso". .

The exchange rate is defined simply as the value of one currency against another, in this case against the dollar.

The truth is that the performance of the Mexican currency has little to do with economic superpowers and its recent stability is subject to multiple factors, not necessarily linked to the health of the country's economy.

"It is an obsession to measure the strength of the economy with the exchange rate," says Jorge Sánchez Tello, director of Applied Research at the Fundación de Estudios Financieros, Fundef, in an interview.

"The peso has appreciated due to different factors such as remittances, the weakening of the dollar and the increase in interest rates," he summarizes.

It has been an unusual start to the year for the Latin American currency, but it is undoubtedly related to the weakening of the US dollar.

This week, the US Federal Reserve raised the benchmark interest rate by 25 basis points to a range between 4.50 and 4.75%.

According to several economic analysts, Jerome Powell, president of the Fed, sent the signal that the cycle of rate increases could end in May, so that only two additional increases of 25 base points each would remain, to bring the rate to a range between 5.00 and 5.25%.

"The Fed was interpreted as less restrictive, generating a loss in the weighted dollar index in the last two sessions," says Gabriela Siller, director of economic analysis at Grupo Base.

If the behavior of the currency is observed as a weakness of the dollar, rather than as a strength of the Mexican peso, it is observed that the dollar has weakened 1.9% so far this year, and speculation about the bank's decisions North American central feed its fall.

"Other international elements that could have contributed to the appreciation of the exchange rate are the distance that Latin America has from the armed conflict in Ukraine, which helps the economic outlook of the region, including Mexico, and the weakening of the Chinese economy," he comments. Alejandro Saldaña, Chief Economist at Grupo Financiero Bx+.

The weakness of the dollar has given gain to many other emerging currencies, in addition to the Mexican peso.

According to Bloomberg, the Mexican peso has gained 3.5% so far this year, while the Chilean peso has gained 6.2%, the Colombian appreciated 3.9% and the Brazilian real has gained 4% in the first days of 2023.

On the other hand, if the internal factors that provide strength to the peso are observed, there are the monetary policy decisions of the Bank of Mexico, in particular the sustained increase in the reference interest rate, which has added 6.5 percentage points since June 2021. "We must add that the three main rating agencies reaffirmed the evaluation of the Federal Government's debt within the Investment Grade, considering that the debt levels are manageable and recognizing the commitment of the current administration with fiscal stability ”, adds Saldana.

In this sense, investors have received a safety signal from the Mexican economy.

The chiaroscuro of the appreciation of the peso against the dollar

Is it good or bad for the economy that the peso is below 19 units per dollar?

It depends on the sector you look at.

While the remittance of dollars in Mexico reached a historical record of 58,497 million dollars in 2022, the families that have received this income have observed a loss of purchasing power due to the strength of the peso or the weakness of the dollar.

Compared to last year, there is an 11.1% drop in purchasing power compared to 2021, once inflation is discounted.

On the other hand, a “super peso” weakens the export sector by making manufacturing, automotive and agri-food exchange more expensive, among others.

Associating the appreciation of the peso with the strength of the economy at a psychological level is a habit among Mexicans due to the instability that the currency had in other decades, when inflation rates were highly variable and the exchange rate fluctuated significantly in one day. to another.

"At that time there was no flexible exchange rate and the management of the economy was very bad, and today we should see it as normal for the peso to appreciate or depreciate," says the director of Fundef.

“Without a doubt the psychological effect of the past is still present in our lives with the exchange rate, but it has been changing a bit,” he concludes.

The Mexican exchange rate is already 1 peso below its equilibrium level, with which the peso shows an overvaluation of approximately 5%.

— Gabriela Siller Pagaza (@GabySillerP) February 2, 2023

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Source: elparis

All news articles on 2023-02-03

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