The extreme strength of the Mexican peso, is it momentary? 3 things that explain what happen


The Mexican peso is the strongest currency so far in 2023. How long will this appreciation last and why is it happening?

Yes, the Mexican peso is currently the most appreciated currency in the world so far this year, with a gain of 7.9 percent against the dollar.

Yes, it is a real strength and worth recognizing.

But, this strength is not explained only by what happened in a few months, years and not even in one administration. In fact, his explanation is more in depth.

For the peso to get to where it is, and without forgetting that it is still a conjunctural situation like everything in the financial markets, some factors come together without which it would be impossible to count on what is currently the most solid currency in the world, our Peso.

The 3 historical factors that explain the extreme strength of the Mexican peso

Thus, there are at least three factors in the recent history of the country; that is, of the last four decades, which are a direct consequence of the current exchange rate strength:

1. The homework was done and the 4 recent governments (including this one), have not played with the economy

After the serious devaluation of December 1994 that began that long economic night known and summarized by history as “the December error”, the administration of former President Ernesto Zedillo Ponce de León began a task that has been collected its fruits to this day, even if you don’t want to recognize it.

The beginning of the free float in the exchange rate has marked an entire era, at that moment the world was headed that way, and the officials of that time understood it that way.

The Zedillo administration laid the foundations for a competitive peso, but always subject to market forces, thereby completely removing the powers and intentions of politicians to control the exchange rate according to their convenience.

Although the autonomy of Banco de México formally began in the previous administration (April 1, 1994), it is in the six-year term of President Zedillo when the positive effects begin to be noticed.

Zedillo’s six-year term then laid the economic foundations of the current model, which in fact is still in force.

No changes, but with confidence for the Mexican peso

Yes, it must be recognized that in the current era of political transition none of the 4 leaders who have paraded so far have played or tried to play with the economy, and this has allowed the Mexican peso to “evolve” in the market.

Although they also (it must be said) couldn’t gamble with the economy if they tried unless they wanted to cause havoc.

Neither Vicente Fox Quesada, Felipe Calderón Hinojosa, Enrique Peña Nieto or Andrés Manuel López Obrador have tried any radical change to the economic model that allows and explains to a large extent the current strength of the peso, because that translates into confidence for the capitals, which they know that at least until now and despite the political disputes, there are no changes in the fundamentals of the Mexican economy, which are about to celebrate at least 30 years, or more.

In essence, and even though it is not currently liked, the fundamentals of the Mexican economy come from what is now called the neoliberal period, the markets know it and the peso receives the benefits.

2. The pandemic moved everything

The pandemic moved the entire world, generated a global imbalance and the economy was no exception.

Regions like Europe showed their economic vulnerability; at the same time it boosted economies like India for its cost benefits, but also a very distant market for many of the world’s large consumer sites. The pandemic left China as the great power with great risks, from economic to even health. It also uncovered Russia from that layer of “sleeping power” with which its leader Vladimir Putin covered himself and forced it to go on the offensive with a warlike aggression.

All the above factors and many more completely moved capital, both short-term and volatile, predominantly in force in financial markets, and long-term generally linked to Foreign Direct Investment (FDI).

But there was something that the pandemic did not change, at least for the moment: the great consumer market in the world is still in the United States, and everything indicates that it will continue to be that way for several more decades.

Therefore, the markets close to the United States are and should be widely favored areas in many ways. If these areas also offer attractive interest rates, the table is set to direct a “rain of capital” to that destination. This factor, the interest rate, is the third on the list.

3. Difference in Mexico-US rates, a real magnet

This factor is not new; in fact, historically it has marked and explained the evolution of the exchange rate in Mexico. In such a relevant period for the economic history of the world, it could not be the exception.

When the current administration began, the rate difference between the central banks of Mexico and the United States was 400 basis points, already a significant gap, and the peso had been appreciating ever since. But that difference today is 625 basis points.

When the global economy shut down and it seemed the world was collapsing, interest rates in the United States and in the industrialized world in general plummeted to absolute zero, but in Mexico the lowest they ever fell was 4.5 percent; that is to say, there was a difference of 450 base points that were “golden ground” for the capitals. That is why the Mexican peso has gone from 25.13 pesos per dollar as the historical maximum registered on March 23, 2020, to 17.95 pesos last Friday. Large capital receives a financial benefit that is almost impossible to achieve elsewhere, and if it exists in other parts of the planet, the risk is immense, as Argentina, Venezuela, Nicaragua, to name a few places.

This factor, the difference between interest rates in Mexico and the United States, has explained the relationship between the peso and the dollar for decades.

In short, what about the Peso?

In summary, yes it is to recognize the current strength of the Mexican peso and yes, it is to a certain extent, a good moment and news for the Mexican economy, we do have for the moment the most appreciated currency in the world.

But, it is not only the result of recent actions, the same ones that are recognized, but in reality, the product of at least three historical factors that allow this exchange rate strength that we do not know how long it will last or what its final balances will be.

This government joins three others that in the current century have not played with the country’s economic foundations, plus an administration that laid the foundations for the fruits that are reaped today.

By Antonio Sandoval

Source: Emprendedor