This is how the mechanism works with which large investors obtain profits with the peso that they could not obtain anywhere else.
The Mexican peso is close to the psychological floor of 19 units per dollar; say those who know that if it breaks this level it could head to what they call “the next support”, which is located at 18.80 pesos.
Technical analysts consider that if the peso gains strength and breaks the level of 18.80 units, it would hardly stop until it sees 18.50 and 18.30 pesos.
Everything is, of course, speculation because, as we know, everything can be changed in an instant.
But the same experts point out that the peso began 2023 just as the other period ended: with even greater strength.
There are several factors that have been pointed out on various occasions to explain this “strong” weight, it has been pointed out how the global context has everything to do with the exchange rate strength in our country, seasoned with some internal factors.
There is no other way to explain that precisely on the day that the World Bank cuts its expectation of Mexico’s GDP to less than 1 percent, it turns out that the peso is close to 19 units.
One factor could be the summit of North American leaders, which was held in our country. However, beyond a previous agenda that over time will reflect results or not, the truth is that no spectacular announcement was made either.
Trading and arbitration, the key
Mexico, and specifically its currency, is in a situation not seen in decades. But it is not because the exchange rate is discounting some positive economic factor, definitely not.
In fact, we can say that Mexico has gone back decades in this regard, since those foreign capitals, swallows; those who have done so much damage according to the ideology of the acting government, live in a true “exchange paradise”
The mechanism with which this paradise works is called “exchange arbitration”.
And everything is carried out in “trading”, another anglicism of financial jargon that is nothing more than operations in the markets.
These two words or phrases: trading and exchange rate arbitrage, are the key to the peso being “strong”, and it will most likely continue to be so if the scenario does not change.
The mechanism to win with weight
The first of the “anchors” for investors is in interest rates; As we know today, Mexico, or rather the Mexican markets, offer approximately 600 additional basis points to those paid in the United States. Equivalent to 6 percent. A rate of 10.5 percent versus one of 4.5 percent. It is a great prize, not like that of other times, but impossible to disdain.
But the arrival of foreign capital in arbitration operations through day-to-day trading, causes the appreciation of the peso, which we have seen for several months and is taken as a success of government management.
This appreciation means a benefit for the country without a doubt, but also for foreign capital.
I will try to explain in the simplest way and with numbers what happens.
The mechanism works like this: let’s say that an investment fund decides to allocate 1 million dollars to the Mexican markets on the last day of last year, to celebrate the new year with the expectation of good returns. It sells that amount of dollars in Mexico and invests the pesos obtained, of course, in the local market.
Those million dollars becomes 19.47 million pesos, at that day’s exchange rate.
In his country of origin, that million dollars would earn 4.5% per year if it is doing well.
In Mexico, that million dollars converted to pesos earns 10.5% annually.
So far, we have a successful investment with a benefit of more or less 600 base points for the investor. Equivalent to 6 percent. Anyone who wants to see their money grow will be more than happy with this operation.
But it turns out that that investor receives additional good news: it happens that the exchange rate that he used on the last day of 2022 to transfer his dollars to pesos is no longer valid, its place there is a lower one, so he decided to “cut” his investment and they offer an exchange rate of 19.06 pesos; In other words, he will have to pay 19.06 million pesos for his million dollars.
So, in addition to an interest rate return, he has what is called a “financial benefit” of more or less 38,000 pesos. This benefit can be represented in interest rate.
The appreciation of the peso between 19.47 and 19.06 pesos is 2.15 percent.
So, it turns out that that investor did not earn a return of 600 basis points, or 6 percent.
In reality, his return was 815 basis points, or 8.15 percent.
That is, 600 base points of the investment financial statement in pesos, plus 215 base points of the yield generated by the exchange rate appreciation.
Do you see why foreign investors are “jumping for joy”? In no industrialized market would they get a return like the above, NO!
But there is still more.
Suppose that same investor decides to cut his investment until the 20th of this month, and that by then the peso, between rises and falls, reflects the same appreciation, that is, 2.15 percent.
In this case, the investor earns an annual return of 10.5 percent, plus an exchange benefit of 4.3 percent because the benefit was for 20 days and not for 10 as in the previous example.
To not to go into more technical details, kind reader, the appreciation rate of the peso is so important today that, if a capitalist leaves his investment all year and at the end of 2023 the same appreciation is maintained, the benefit would be in double digits.
Foreign capital is today in an authentic “exchange paradise”. The stability of the peso and its eventual strength is good news; in fact, very good news, the Mexican economy wins and investors win, it is the ideal world.
By:Antonio Sandoval
Source: Alto Nivel
