Amid the emerging-market currencies this year, there’s a surprisingly resilient outlier: the Mexican peso


It’s held up as almost every peer succumbed to the dollar’s relentless push higher, an outperformance so stark that a few analysts have taken to calling it the “super peso.”

Some of the strength stems from fairly typical drivers — a tight fiscal policy and interest-rates increases that have lifted the carry trade. But another key factor is expectations for a sea change in global trade in coming years that could bring a surge in foreign direct investment.

Mexico is luring factories from China as higher wages and a jump in transportation costs undermine what had been its competitive advantages. A Covid-induced aversion to far-flung supply chains is also pushing companies to move operations from Asia to nearer the US — the world’s biggest market — a shift known as “nearshoring.” Adding to those logistics concerns are the strict shutdowns as part of China’s Covid Zero policy and concerns that China could make a move against Taiwan that would spur sanctions from Western countries.

It’s the beginning of a turnaround from two decades ago when China joined the World Trade Organization and quickly displaced Mexico as the top manufacturing hub for US companies. Now, Mexico’s exports to the US are narrowing the gap with China, and the currency market is being roiled, shocking investors who at the end of last year were forecasting the peso would be one of the world’s biggest losers in 2022.

“Mexico is beginning to reclaim the competitive advantages it lost decades ago,” said Hari Hariharan, the chief executive officer of New York-based hedge fund NWI Management. “This is going to be a decade of an ascent of Mexico at the expense of China.”

The shift can also be seen in the Mexican peso’s performance against China’s yuan. Since the height of the pandemic selloff in March 2020, the peso has rallied about 15% versus its Chinese counterpart, one of the best performances among major currencies. Nearshoring will accelerate this trend in the coming decade, according to Hariharan.

Source: El Financiero

Mexico Daily Post