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Peso looses ground amid regional jitters
In June, the Mexican peso weakened substantially. Since the end of May,
when the peso stood at 9.65 versus the US$, the currency has lost more
than 3% in nominal terms against the US$ and even briefly tested the
psychologically important 10 pesos/US$ threshold. In early July, the
currency gained some territory, ending at 9.92 on 5 July. Some observers
link the peso weakness to the recent weakness of the US$ against the euro.
The logic behind such a link is that the weaker US$ reflects a more
subdued outlook for the US economy, which would translate into lower
Mexican growth. However, rather than being the result of this medium to
long-term relation between the euro and the US$, the recent peso weakness
is more likely attributable to domestic and regional causes. In the past
two years, the Mexican peso has actually been one of the strongest
currencies in the world relative to the US$, earning it the nickname of “super-peso”.
The two-year stretch of unaccustomed vigour had followed on a period of
rapid deterioration in value up to January 1999. In part, the peso
strength reflected the growing awareness of the market that the Mexican
Central Bank was not only serious but also successful in containing
inflation and is now within reach of its proclaimed long-term objective of
lowering inflation to international levels. The Central Bank credibility
is now factored into the peso and in part, the recent weakness may just
represent a normal market movement following on a long period of
extraordinary strength. In addition, the situation in Argentina and more
recently Brazil is causing concerns about potential contagion to other
countries in the region. Due to Mexico’s close links with the United
States, the country seems well shielded from a regional fallout that would
follow if the Brazilian situation deteriorates further. Nevertheless,
Mexico would suffer from reduced capital flows to emerging markets, as
investors would prefer safer havens. While panellists now foresee a weaker
peso than last month they still believe that the recent weakness will
remain short-lived and on average expect the peso to regain some of its
losses by the end of the year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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