An essential element that could contribute to the strength of the peso is the general weakening of the dollar, which responds to a greater appetite for global risk in the face of better-than-expected economic data.
The continued strength of the Mexican peso is an element that never ceases to surprise locals and strangers. So far this year, the Mexican currency, according to the value of the FIX exchange rate, accumulates an appreciation of 9.5%, positioning itself at levels not seen since 2017.
Faced with such dynamics, it is natural to ask: What is behind this behavior? What explains this unusual strength that no member of the market envisioned? Is it a sustainable effect or only transitory?
From our point of view, this surprising behavior is the result of a combination of four factors.
First of all, and as has been shown so much, an interest rate differential between Mexico and the United States of around 600 basis points (bp) has been one of the main drivers for the peso to strengthen.
Equally important, the expectation that this differential will remain around such levels has also notably contributed to the favorable dynamics of the peso.
Now, it is important to mention that, although said differential is high, it does not represent a historically high one since, during 2009, and given the complex global financial situation that affected it, the difference between rates exceeded current levels. This fact could suggest that there are other factors behind that are affecting the price of the peso and not merely a rate differential.
In this sense, a fundamental element that could contribute to the strength of the peso is the general weakening of the dollar, which responds to a greater appetite for global risk in the face of better-than-expected economic data and clearer signs of the end of the restrictive cycle due to part of the United States Federal Reserve (Fed).
In such a context, there is an element that has not been given the necessary prominence and that could be one of the major explanatory variables for the behavior of the weakness of the dollar despite the resilience of its economic activity and its labor market: its dynamics. commercial.
Since the Covid-19 pandemic in March 2020, imports from the United States have grown exponentially at a rate that its exports have not been able to match to this day. This has produced especially high trade deficits.
This could be contributing to the current weakness of the dollar since the United States, like many nations around the world, has a flexible exchange rate, which responds instantly not only to financial and geopolitical stress events, but also as a means of correction against imbalances in its trade balance.
Along the same lines as the previous element, Mexico’s privileged and strategic position with the United States has produced the merchandise substitution element that has always existed as a possibility for Mexico, but which has taken on special relevance with the deterioration in supply chains. supply, will become more dynamic (the already known nearshoring).
This fact has undoubtedly caused a greater demand for Mexican pesos, which, together with its favorable liquidity, has notably strengthened the price of the national currency.
Finally, another widely used argument that could interfere, but is not transcendental in the behavior of the peso given the differentiation granted among its emerging peers, is the highly acclaimed framework of healthy public finances that the current administration has perpetuated throughout its six-year term. although there have been high costs in terms of the well-being of society for the preservation of said framework.
Once the elements to which we attribute the surprising strength of the weight have been explained, two nuances should be noted: the first is that, as long as the conditions of such elements continue without major shocks, the strength of the weight will continue.
Second, given the volatile nature of the effects that have affected the favorable dynamics of the peso, there is a certain fragility in them; that is to say, if events are registered both inside and outside that break with the current conditions, the advances that have been registered in the Mexican currency could be compromised with relative ease.
