The main topic of conversation in Mexico these days is the peso, how much it’s fallen against the dollar and how far can it go, the reasons for its weakness and how long it will last.
Among the reasons given for the peso’s weakness is the uncertainty regarding Greece these last few months, the Fed getting ready to raise interest rates, the price of oil trending down again, and even the drug lord Chapo breaking out of the highest security prison in the country. The thing is, there is no lack of reasons for the pressure on the peso.
During this week, the peso reached a new record against the dollar, way above the psychological barrier at 16 pesos per dollar. The most negative market participants expected 17 after the Greek referendum, and although it hasn’t reached that level, the depreciation seems unstoppable and it seems it’s just a matter of time before it does.
In the last few days, the peso’s movement, in part, has been a reaction to statements by Fed members that consider the US economy ready for the first rate hike this year. Higher interest rates would make investment in the US more attractive, and that is pushing the dollar upwards against most currencies. Most investors and analysts assume a September hike and that is already generating questions regarding a reduction in liquidity and its impact on all asset markets.
In fact, let’s not forget that this whole downward movement started back in October, precisely when the Fed ended its QE program and the peso was at 13.20.
In the last few days of the year, the pressure on the peso increased greatly and suddenly, as oil prices melted down. Of course, other oil currencies, like the Canadian dollar, the Norwegian krone, the Brazilian real, not to mention the Russian rouble, all met the same fate. This event took the peso all the way to 15.
Around March of this year, the third part of the Greek saga began to surface. Greece’s problems have been discussed at length, so we’ll just say that it’s been the source of a serious case of risk aversion in global markets. So the peso continued falling to 15.60.
Just a couple of weeks ago, the huge event that caught everyone’s attention was the nuclear deal between Iran and the six powers. What the markets took away was that sanctions on Iran will be lifted and, eventually, the country will be back in the oil market, increasing supply. That Iran’s industry has to be rebuilt almost completely, and that it will take many months before they are able to export didn’t matter to market players – oil prices simply dived again. The Iran deal pushed the peso to 15.90.
In these last few days, the Fed factor is back with force because the next Fed meeting is scheduled for next week, and the committee is expected to use the communique to prepare the market for the hike in September.
The thing is that, everything together, plus the fact that Mexico is an emerging economy, and therefore considered more vulnerable, have taken the price of the dollar beyond the psychological resistance at 16, to almost 16.30 pesos. Even worse, the Greek story and the fall in oil prices are still ongoing, and nerves about the Fed will only grow until the meeting, and maybe even beyond. It surely won’t be easy for the peso to find its footing in the immediate future, even though it is extremely under-valued.