The Mexican peso has benefited from the relocation of Chinese companies in Mexico, in order to supply goods to the US market – the largest in the world – as part of the process known as “nearshoring”.
This is established in the latest edition of the Border Business Barometer published by the University of Texas at El Paso (UTEP).
“Increased foreign direct investment flows as a result of the relocation of the USMCA, plus relatively higher interest rates in Mexico, could allow additional gains in the bilateral exchange rate of the Aztec currency in 2023,” says the barometer, which is produced by economists Thomas and Steven Fullerton.
“Across the river in Ciudad Juárez and the state of Chihuahua, interest rates have risen fairly steadily since June 2021. Short-term interest rates now exceed 11 percent,” the study notes.
“Many analysts in Mexico believe that monetary policy will continue to tighten in the coming weeks and that short-term rates will rise another 50 basis points before stabilizing,” the analysis adds.
Economists note that a stronger peso makes it less expensive for residents of Northern Mexico to buy goods and services in El Paso. Consequently, personal vehicle and pedestrian traffic flows across international bridges increased in 2022.
“However, geopolitical events may unexpectedly disrupt the currency market in the coming months,” adds the text, which also attributes the appreciation of the Mexican currency to higher returns on investments in pesos, given the increase in interest by Banxico.
“In real terms, it’s easy to see how much ground the peso has gained against the dollar. Beyond this metric, the local nominal indicator of the restaurant price index in pesos per dollar indicates that a greater appreciation of the peso would not be surprising”, considers the edition number 3 of Volume 7 of the analysis that is presented monthly by UTEP.
Tesla effect and remittances
The Mexican currency reached its strongest level in almost five years at the beginning of March due to Tesla Inc.’s decision to build an assembly plant in the northern part of the country. Even before the deal was made public, the peso was soaring: its 7.7% gain against the dollar this year has outperformed the 15 other major currencies tracked by Bloomberg.
Tesla’s multibillion-dollar investment highlights the Latin American nation as a destination for factories seeking to relocate from faraway countries, a trend called “nearshoring,” according to Bank of America economist Carlos Capistrán.
“Tesla’s announcement is a confirmation that ‘nearshoring’ is a unique opportunity for Mexico,” he said.
Musk’s company will invest around $5 billion in the project.
Since Banxico’s bigger-than-expected rise last month, which sent borrowing costs up 11 percent, the peso has risen 3.7 percent as major crosses were dragged down by global risk aversion.
Banxico Governor Victoria Rodríguez said on Wednesday that core inflation is not falling decidedly yet, supporting expectations of further rate hikes.
Also helping the peso rebound, remittances rose 12.5% in January compared with a year earlier, central bank data showed.
Investment bank UBS expects the Mexican peso to reach the 18 to the dollar mark by mid-year, wrote Alejo Czerwonko, chief investment officer for emerging markets in the Americas.
