Bet on a stable peso remains in the markets

The stability of the peso, one of the most traded currencies of emerging economies – because it is possible to buy or sell the Mexican currency in the global financial system 24 hours a day, 365 days a year – has been consolidated this year, trading at 16.53 units. per dollar spotits lowest level since the end of 2015, according to official data.

Several facts stand out about one of the operators’ favorite currencies to invest in, according to specialists.

The peso reached its lowest value in its almost 30-year history of free floating – which varies due to its supply and demand in the international currency market – on March 23, 2020, in the midst of the Covid pandemic crisis. 19, with a price of 25.1050 units per dollar in the wholesale market. From then to date it has appreciated 34.11 percent.

At the level of emerging economies, the peso is the one that has performed the best, since in 2023 it achieved an unprecedented gain for the end of the year of 13 percent and was one of the strongest international currencies against the dollar.

Superweight count

The stars seem to align with the exchange rate in Mexico. In an environment of high inflation, the central banks of Mexico and the United States have had to raise their interest rates – which determine the cost of credit at which companies and people are financed – but the differential between Banco de México (BdeM), located at 11 percent, and that of the Federal Reserve (Fed), at 5.50 percent, makes it more profitable for international investors to buy government bonds in Mexico, which is why they accept the greatest risk.

Another reason for the stability of superweight It is the income of dollars to the country due to the increase in exports of 593 thousand 12 million dollars in 2023, recording a maximum amount, driven by foreign sales of the automotive industry.

In addition to the above, shipments made by Mexicans living abroad amounted to a record of 63,286 million dollars last year, and foreign direct investment (FDI) totaled 32,900 million dollars.

The above is explained because Mexico replaced China in 2023 as the largest exporter to the United States after 16 years of Beijing maintaining first place.

Furthermore, the country is in a privileged area in the search for global manufacturers, especially in sectors such as chipscars, electric vehicles and batteries, to locate new plants.

“40 percent of the exchange rate movement is internal. Mexico’s external accounts are good, the banking system in the country is capitalized, companies are not going bankrupt, the Bank of Mexico is autonomous and public finances – with a credible plan to reduce the deficit in the next administration – are stable, so that internally there is a support for the weight. Thus, the external comes in as the main factor – inflation and interest rates in the United States –, so any decision by the Federal Reserve will move the exchange rate,” said Marco Oviedo, strategist for Latin America at XP Investments.

Different angles

A heavy weight does not benefit everyone equally. According to the Mexico collective, how are we doing?, an expensive peso benefits those who have debts or financial obligations in dollars, importers, those who are going to make a trip abroad or those who buy inputs in the international market for their production.

However, it harms those who receive income from abroad, such as families receiving remittances, since they receive fewer pesos per dollar sent; to foreign tourists, because consuming in Mexico is more expensive for them; and those who sell their products abroad (exporters), because they become more expensive and lose competitiveness.

For example, John Joseph Li Ng, analyst senior of BBVA, explained that the appreciation of the peso and inflation caused households in Mexico to receive 8.8 percent less money in real terms in February than 12 months ago. That is, to buy the same thing as before in pesos, households need to receive more dollars.

Long live stability?

“So far everyone is very comfortable with long positions in the peso; Nobody wants to go short because there is no strong argument to go against it. There are some levels, because right now many are betting at 16.80 per dollar and taking profits, which in slang is called helmet, but nothing strong, they are not in strong positions, so that is what gives stability to the currency. Large investment funds are long and hedge funds They are in strategic positions,” Oviedo explained.

For her part, Janneth Quiroz, director of economic analysis, exchange rate and stock market at Monex, predicts that operators in the futures market of the Chicago Mercantile Exchange (CME) will maintain their positions in favor of the peso for the remainder of 2024.

However, the election period brings uncertainty, warned Quiroz, since with the elections there are possible changes in the conduct of economic policy, although with the continuity that would be observed with Claudia Sheinbaum, if she were the eventual winner of the contest, the uncertainty could be low. However, geopolitical problems in the Middle East are on the scene.

Investors are comfortable so far with the scenario that is seen on June 2, because according to surveys, Sheinbaum is leading; Although an alternation with Xóchitl Gálvez, she does not bother them either.

Marco Oviedo warned, without being the base scenario, that if a political crisis were to arise due to Morena not recognizing the results of the elections, or if something unexpected happened, such as an accident, the exchange rate would come under strong pressure.

In contrast, the re-election of Donald Trump as president of the United States would not bring so much nervousness, since the markets already know it, unless he messes with the T-MEC again, that would put the peso in trouble and lead it to rebound above 18 per dollar.

Another important element to keep the peso stable, once the elections in Mexico pass, will be how the new administration makes Petróleos Mexicanos (Pemex) viable.

The federal government has come to the aid of Pemex, by forgiving a series of taxes, for example, and yet it remains one of the most indebted companies in the world, with more than 100 billion dollars. The complicated financial situation of the parastatal will be in the air and will put pressure on the peso if the same current policy is maintained. Weight stability could expire.