Mexico reaps the fruits of a strong currency and looks to the US attentive to a possible fall

Mexican pesos and dollars in a currency exchange house in Laredo, in the State of Texas (USA). Eddie Seal (Bloomberg)

“I think this is a surprise for everyone,” says economist Janneth Quiroz.

The unexpected performance of the Mexican peso has caused analysts like her to reassess their economic prospects for the country, the second largest economy in Latin America.

Last year, it was the second most appreciated currency in the world and this year it tops the list.

Since it was allowed to float freely in the market in the 1990s, there have been few times when the peso has had periods of appreciation.

Rather, the peso depreciates in the long term and the strength of recent months is something that market analysts, such as Quiroz, did not foresee.

"Taking into account that we come from such a strong fall in the pandemic, I think it is the greatest appreciation we have had," says the specialist.

The Mexican peso has appreciated 26% against the dollar since April 2020, when it hit a record high of 24.85, according to data from the Bank of Mexico.

Today, a dollar costs 18.40 pesos.

The impulse is multifactorial: the central bank has raised rates to a very attractive level for foreign capital, the inflow of foreign currency from exports, tourism, as well as remittances from compatriots abroad has increased, and foreign direct investment (FDI). it has also been on the rise, stemming from a global trend to move factories of US companies from Asia to Mexico.

As in any market movement, in this exchange rate there are winners and losers.

For a high socio-economic stratum, those with greater purchasing power, the strength of the peso has meant a greater opportunity to travel or buy imported products.

In addition, Quiroz says, "if we did not have this exchange rate at these levels, inflation would be higher."

The latest record of the Consumer Price Index (CPI) for February is 7.62%, well above the central bank's target range.

The inflationary phenomenon of recent years has an important global component, explains the specialist, so that without a stronger currency, imports would be more expensive, exacerbating inflation.

On the other hand, there are losers.

Millions of families that depend on the dollars sent by workers in the United States have seen their purchasing power diminish.

Companies that export their products abroad also become less competitive, since a strong peso makes their products more expensive.

This strength has all Mexicans who follow the exchange rate market looking to the future with caution, says Quiroz, chief economist at Monex Grupo Financiero, "it was at the end of last year, when the dollar traded at less than 19 pesos, that This nervousness started about when it is going to rebound.”

The strength of the peso is something relatively extraordinary for Mexicans.

Since its name in 1994, there have been three times when it has appreciated significantly: from 2009 to 2011, after the global financial crisis, it recovered 24%;

in the first eight months of 2017, after the implementation of economic reforms, it rose 18%;

and on this occasion.

"This moment is so extraordinary," says Quiroz, "that economic actors that are very sensitive to the exchange rate, such as exporters, are waiting for it to fall."

Bank of America has warned of possible "downside risks."

In a report sent to clients this week, investment bank analysts Carlos Capistran, Christian Gonzalez and Claudio Irigoyen warn about the pressure that the peso could suffer if the US enters a recession.

“The sharp contraction in remittances could translate into a larger current account deficit that could be difficult to finance unless portfolio flows or FDI recover,” the specialists wrote.

"Finally, we believe that the peso could be under strong downward pressure if the Bank of Mexico falls into the temptation of reducing its differential against the Fed", referring to the interest rate that is today much more attractive than that of USA

"Unless Mexico can significantly capture the benefits of close outsourcing and increase productivity, we believe that the peso will tend to weaken in the long term to reflect the wider productivity gap between the US and Mexico," concludes Bank of America. .

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