- Cecilia Baria
- BBC News World
The so-called “superweight” benefits Mexico.
Which is that the Mexican peso appreciated against the US dollar in 2022, hitting its best level in just over two years against the dollar.
This is happening to the point that interest rates in both countries have been rising at different speeds.
So far this year, the peso has appreciated 4.3% against the dollar, a jump that has prompted Mexicans to talk about “sorweight “.
Now, it is important to keep in mind that the currencies of the largest economies in the region have also risen, with Brazil taking the top spot.
The only currency that has lost value this year against the dollar is the Argentine peso.
1. Why is the Mexican Peso soaring?
there are many reasons. One relates to interest rates in Mexico and the United States.
Latin America was the first region to start raising interest rates, that is, increasing the cost of borrowing money.
To the extent that the Federal Reserve (Fed), the equivalent of the US central bank, has kept interest rates close to zero (what is known as the era of cheap money), investors have put part of their money in emerging markets that though riskier, also offer higher returns.
But when inflation started to rise, rates (or cost of borrowing money) also started to rise in different countries of the world to try to control it.
Well, Latin American economies have rapidly increased the cost of money in order to control the tide of inflation, and they have done so faster than the United States.
This is why experts say the “price differential” with the world’s largest economy has contributed to the appreciation of the Mexican peso.
The thing to bear in mind is that the markets are operating on expectations, and since there are now speculations that the Fed won’t raise interest rates as expected, the dollar is falling.
“This makes the dollar weaken a little,” explains Carlos Gonzalez, director of economic analysis, exchanges and stock market at Monex financial group.
The same thing happens in the opposite direction. Markets are anticipating that Mexico’s central bank will soon decide on a strong interest rate hike in that country, an expectation that will strengthen the peso.
“This is the main reason why our currency is stronger against the dollar.”as he says in an interview with BBC Mundo.
To complete the puzzle, other factors must also be taken into account, such as the fact that Mexico has relatively good public finances, increased remittances in the last quarter, increased oil prices, and increased investor confidence in the Mexican peso.
2. How does the peso’s appreciation compare to other currencies in the region?
“Compared to other economies in Latin America, the Mexican peso is not the most appreciated currency,” says Eduardo Carvajal, professor of economics and finance at Tecnológico de Monterrey in Mexico.
however, “It is remarkable the value that I have gained against the dollar in the year”. Even, he adds, when analyzing the month of May exclusively, the Mexican peso is the second currency that has gained the most value, after only the Brazilian real.
3. What could happen in the future?
Some analysts are betting that the Mexican peso will continue to appreciate, to the point that the Federal Reserve will raise its rates at a slower pace, and, conversely, Bank of Mexico sets the accelerator.
Undoubtedly, what is happening in the neighboring country has a direct impact on the Mexican markets and economy.
This is why investors are interested in all the signals that the central banks of the two countries can provide.
Other experts are inclined to the idea that the appreciation of the Mexican peso is somewhat temporary.
“My opinion is that this strength is temporary And that the peso is overvalued, as there are no results of foreign direct investment, industrial growth or GDP that support the peso in the medium term.”
In any case, it is difficult to make predictions with the extreme volatility present in the markets and the ongoing war in Ukraine, a conflict whose course remains uncertain.
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