Trading The Mexican Peso: What To Know
When talking about America, most of us think of the United States of America or, in some cases, Canada. However, Mexico is among the countries with the richest histories in the continent and a growing economy. Trading the Mexican peso (MXN) against the major currencies such as the US dollar, the euro or the British pound may be options if traders would like to create a diversified trading portfolio.
However, the truth is that the Mexican peso is not exactly popular as its most famous counterparts. In this blog, we will share with you some valuable insights regarding the Mexican peso and its correlation to the Mexican economy that could be hard to find in just one blog.
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The Mexican Peso And The Mexican Economy
Mexico has a population of 128,000,000 people and the 14th largest GDP in nominal terms in the world. The International Monetary Fund (IMF) has raised its 2023 GDP growth forecast for Mexico to 2.6%, a 0.8% hike on the 1.8% growth it predicted in April.
The revised outlook reflects the positive economic results the country has seen in the last few months. The economy grew 1.1% in the first quarter of 2023, surpassing analysts’ expectations and building on six consecutive quarters of growth.
According to a report published by the Mexican National Institute of Geography and Statistics (INEGI), annual headline CPI inflation continued to fall during July, reaching 4.79%. The figure was in line with analysts’ expectations and marks the 6th inflation drop in a row.
The main goal of Banco de México (Mexico’s central bank) is to preserve the value of Mexico’s currency in the long term in order to improve Mexicans’ well-being, while maintaining low and stable inflation. According to its website, Banco de México was established on September 1st 1925. Mexico’s economy has faced ups and downs in the last few decades, with the central bank playing a pivotal role in bringing down inflation. Since 1994, Banco de México (Banxico) has been autonomous in designing and implementing its monetary policy.
Mexican Peso Performance
After briefly touching a multi-year low of 21.50 in January 2017 against the US dollar, the Mexican peso began a rally, and by September 2017 it was trading at around 17.60. The next two years, the peso stabilized, trading between 18 and 20 pesos to the US dollar.
Date Range: October 1st 2017 – August 17th 2023. Date Captured: August 17th 2023. Past Performance is not an indicator of future results.
The start of the pandemic in 2020 hurt the Mexican currency. The Mexican peso declined in value against the US dollar, touching 25 pesos by the end of March 2020. However, by the end of the year, the peso managed to gain ground, trading at 20 pesos against the US dollar.
Date Range: January 31st 2023 – August 17th 2023. Date Captured: August 17th 2023. Past Performance is not an indicator of future results.
In 2023, the Mexican peso continued to strengthen against the US dollar, trading at 16.75 on July 1st. This was a seven and a half years low, making some social media users refer to the Mexican currency as “super peso.” An ING report noted that, when it comes to LATAM currencies, “the Mexican peso remains one of the top FX performers of the year and is only surpassed by the Colombian peso (offering 14.4% implied yields!). Investors like the high carry in Mexico, the well-run economy and the exposure to surprisingly strong US growth so far this year. Indeed, worker remittances back to Mexico hit a record $5.7bn high in May.”
What Do Analysts Forecast Regarding The Mexican Peso And The Mexican Economy?
The Bank of Mexico kept its benchmark interest rate at 11.25% on August 10th, in line with analysts' forecasts, suggesting that the inflationary outlook remains "very complex" and implying that the rate could hold steady for some months more. The bank’s policymakers said in the post-meeting statement that “in order to achieve an orderly and sustained convergence of headline inflation to the 3% target, (the board) considers that it will be necessary to maintain the reference rate at its current level for an extended period."
ING analysts wrote in a report published on July 18th that “the market discount sees a Mexican central bank rate cut from November. We agree, and we in fact can see rates being cut faster than the market discounts thereafter. There is a lot of comfort built in. This can be gleaned from the appreciation in the peso and falls in market rates.” They also added that “there is a high degree of policy comfort built into the Mexican curve (TIIE), so much so that we are more and more inclined to anticipate initiation of a material easing process in the coming months. The policy rate at 11.25% is some 6% above the Fed funds rate, representing quite a large cushion. It has only been wider on two occasions in the past 15 years – emergency Fed cuts during the Great Financial Crisis and the same at the onset of the pandemic. There is no requirement for this spread to be wider. In fact, we believe it will narrow as the Fed hikes some more, while Banxico holds pat.”
Morgan Stanley economists suggest that nearshoring would likely boost the Mexican economy. In their note to investors, published on July 27th, they noted: “If US manufacturing is to be less dependent on China, we think the path will be via Mexico. Nearshoring is expected to be a long and sustained race that could help build new ecosystems in Mexico’s existing manufacturing hubs. As Mexico’s GDP and manufacturing grow, so too should corporate profits, especially in the financials, industrials and consumer sectors. In fact, during periods of above-average GDP growth, Mexican equities have tended to outperform in terms of valuation, profitability and operating performance. The nearshoring trend has already driven a rerating of Mexican stocks, and strategists see further upside for domestic companies in the next five years as the second wave of nearshoring growth gathers momentum.”
As Mexican citizens are expected to vote in the next year’s elections, Commerzbank’s analysts suggest that the result could be crucial for the Mexican peso and the local economy. “The upcoming elections in July 2024 will be decisive for the Mexican economy and the Peso. Investments in infrastructure, security and human capital, as well as business-friendly reforms, should not only increase Mexico's inherent growth potential, but also enhance the country's attractiveness as an investment destination. With appropriate reforms, we believe Mexico is well positioned to benefit from increased nearshoring and friendshoring activities by global companies, which would have a positive long-term impact on the MXN,” they wrote in their report.
Risk Management When Trading The Mexican Peso
As with every forex currency pair, trading the Mexican peso against the US dollar, the euro, the British pound or other less popular currencies involves risk. Beginner traders who are not experienced in how currency markets work should invest some time expanding their financial knowledge. Knowing the currency market fundamentals could help people who have just begun to trade in building a comprehensive strategy.
A well-prepared strategy could help beginner traders reduce risk. Learning all financial news on time and how markets work wouldn’t be adequate if you don’t study risk management tools. Tools such as the stop-loss order could reduce the loss of funds if markets turn against your plan. If risk management tools are something new to you, it would be best to boost your knowledge around them.
Brokers offer a broad range of educational materials that could help you become a better trader while minimising risks in the process. Beginner traders can take advantage of webinars, blogs, guides, seminars etc., prepared by more experienced traders who share their knowledge with starters. What’s even better is that some of the materials come for free. Don’t miss out on the opportunity to become a better trader!
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
