Mexico: Mexican peso suffers major hit at the beginning of the year
January 13, 2016
The depreciation of Mexico’s currency was a fairly common occurrence among emerging market currencies in the second half of 2015. The peso, however, suffered dramatic falls in the last months of the year and pressures do not seem to be receding in the beginning of 2016. On 13 January, the peso fell to a new historic low of 17.95 per USD. The currency was 3.7% lower compared to the same day in December and, on an annual basis, the peso lost 22.8% of its value against the greenback.
To a large extent, the sharp depreciation the peso experienced in the past months and in the beginning of the year reflects the current environment of low oil prices, which damages the-highly oil-dependent fiscal revenue. In addition, although Mexico is less dependent than other emerging markets on China—and will therefore be less affected by its sharp economic—it is highly reliant on the U.S. economy. As U.S. industrial production tumbles, Mexico’s manufactured exports will also suffer. This has negative spillover effects in other sectors of Mexico’s economy, with a corresponding impact on the currency. On a positive note, the weakening of the peso has acted as a shock absorber due to the improvement in competitiveness of Mexican exports, particularly to the U.S. In addition, inflation closed the year at a historic record low with little evidence of secondary effects from higher import prices. That said, the volatility in financial markets observed in the past months has had a detrimental impact on confidence.
The Central Bank (Banxico) remains concerned about the peso’s weakness of late and monetary authorities’ view so far is that recent trends are on the downside and that stability in the foreign exchange market will likely return once oil prices stabilize. It remains to be seen when oil prices will stabilize and, if pressures intensify, Banxico may consider additional measures to prevent large negative effects that could jeopardize the achievement of its 3.0% inflation target.
Author: Ricardo Aceves, Senior Economist