There are several recent economic and political changes in Mexico that have caused many financial analysts to believe the Mexican peso could be making a significant comeback. These changes include new trade deals made with U.S. President Trump, as well as Mexico’s election of Andrés Manuel López Obrador. Here are the seven primary reasons why the Mexican peso is now stronger than expected:
7 REASONS THE MEXICAN PESO IS GETTING STRONGER
- U.S.-Mexican Trade Deals Went Remarkably Well
- Obrador Set to Work to Make Good on His Campaign Promises of Economic Growth
- The Rising Tide of Mexico’s Economy Is Lifting All Boats
- Mexico’s Rising Interest Rates Stabilizes the Value of the Mexican Peso
- US-Mexican Transparency in Currency Builds New Trust
- Local Currency Swaps Reduce Foreign Exchange Risks
- The United States Dollars to Mexican Pesos Exchange Ratio Increases the Mexican Peso’s Value
On July 1st, Mexico altered the trajectory of its fate after electing a president to serve a six-year term with a visionary grasp of economic growth, fiscal discipline, and monetary policies. Andrés Manuel López Obrador promised the people of Mexico a luminous economic future. Affectionally called “El Peje” for pejelegarto, which is an Alligatorfish from his native state of Tabasco, the leftwing populist won the presidential election by a landslide. Today, long after that ebullient day, many things in Mexico have changed for the better, including a stronger Mexican currency.
In retrospect, many expert-based predictions about the greenback and the Mexican peso for 2018 turned out to be far from accurate. The US dollar was expected to weaken this year, but it got stronger. This happened because the US economy went from strength to strength, with an estimated 235,000 new jobs added to the economy. Analysts were equally taken by surprise by the comeback of the Mexican peso. Compared to this time last year, the peso has turned out to be one of the best-performing currencies against the United States dollar.
WHY INVESTING IN THE MEXICAN PESOS IS A GOOD IDEA
1. U.S.-Mexican Trade Deals Went Remarkably Well
In the early months of the Trump administration, President Donald Trump promised to fulfill his campaign promise to make Mexico build a wall to prevent Mexicans from illegally entering the country. Analysts were concerned how his racially-fraught descriptions of undocumented migrant workers from Mexico would affect US-Mexican relationships and trade agreements.
Despite the fact that Trump also accused Mexico of stealing manufacturing jobs from the United States, the primary conflict that threatened trade agreements between the two countries was the issue of building a border wall. Although the cost of the wall was estimated by Trump to cost $8 billion and by the Department of Homeland Security to cost $21.6 billion, the actual cost of building the wall would be closer to $70 billion with $150 billion a year for its maintenance.
But, at the present time, the Trump administration appears to have resigned itself to accepting the fact that the Mexican leadership remains steadfast in its resolution that it will not finance a border wall. As a result, American taxpayers now appear to be paying for the wall under construction.
With the issue of the wall disappearing in a disassociative fugue, the North American Free Trade Agreement (NAFTA) was back on track. This occurred because of Mexico’s reduced fears about Trump’s negative political and economic policies towards it. A reduction in the inflammatory political rhetoric between the two countries eventually led to a positive expectation about the U.S.-Mexican trade.
So, in a surprising turn of events, there now appears to a trade relationship developing between the United States and Mexico. Meanwhile, to add to the confusion, the United States has tense relations with Canada, with whom it has traditionally always had strong political and economic ties. In the present scenario, then, Mexico is nearing a NAFTA agreement while Canada has been sidelined as an American trading partner. As a result of these bewildering turn of events regarding NAFTA, the peso has emerged as a strong currency.
2. Obrador Set to Work to Make Good on His Campaign Promises of Economic Growth
Mexico’s currency made its gains after Obrador’s election victory because he promised to curb spending, empower the private sector, and ensure the independence of the central bank from government meddling. This strengthening of the currency, in turn, changed the Mexican peso to USD exchange rate.
Obrador went out of his way to assure investors that he would support the high-interest rates that stabilized the currency, as well as not tamper with private investment initiatives. Consequently, the board of the Bank of Mexico unanimously voted not to change its benchmark rate. At 7.75 percent, a nine-year high, this is the highest rate for a country with an investment-grade credit rating.
Obrador appeared to further reinforce his position as a leader determined to provide economic guidance to Mexico when he picked Carlos Urzua, a professor at Tec de Monterrey university as the new finance minister. Urzua’s appointment was looked on favorably by those familiar with economic matters because he had served as minister of finance from 2000 to 2003. During those three years, he had established a solid reputation as a fiscally responsible economist with coherent ideas on economic management.
3. The Rising Tide of Mexico’s Economy Is Lifting All Boats
The Mexican economy began to improve shortly after Obrador was elected because he worked to stay true to his two big campaign promises:
- He promised he would actively seek out solutions to the three biggest issues weakening the economy: poverty, violence, and corruption.
- He also promised that he would boost oil production to 2.5 million barrels a day within a short period of two years to take full advantage of high oil prices because of a global situation where the demand for oil far exceeded the available supply.
Here, in a nutshell, is how he aims to make good on his promises of revitalizing Mexico’s declining oil sector:
- First, his government plans to review oil exploration contracts awarded to foreign companies. These awards were granted because the country needed foreign experts and investment capital to expand its nascent oil industry. However, things did not go as well as envisioned. In fact, after more than a decade, oil production plummeted from 3.5 million down to 1.9 million barrels a day. Refineries were so inefficient and mismanaged that they were operating below 60 percent capacity.
- Second, his government plans to invest $9.4 billion in state-owned oil facilities. The money would be used to build new refineries and renovate existing refineries. Also, it plans to invest $4 billion in Pemex, the state-owned oil monopoly for oil exploration.
Obrador’s positive attitude about Mexico’s economic future is already having remarkable effects. Reuters reported on August 24th, 2018, that the country’s current account deficit shrunk in the second quarter compared to the first quarter by a staggering $3.882 billion. Additionally, employing economic base theory as well as location quotients, tourism and oil will continue to thrive as Mexico’s biggest source of foreign exchange.
4. Mexico’s Rising Interest Rates Stabilizes the Value of the Mexican Peso
Shortly after Trump was elected US president, Banco de México, the central bank of Mexico raised its interest rates a full 0.5 percent, raising it from 4.75 percent to 5.25 percent, to shore up the Mexican peso. This is the highest rate that interest had been since 2009. The central bank believed this was necessary, citing that the global economy had become increasingly complex after Donald Trump’s surprising upset of Hillary Clinton. This early move, well before Obrador’s electoral victory, proved to auger well for the peso.
5. US-Mexican Transparency in Currency Builds New Trust
Transparency in the currency will be a new precedent set by a trade deal intended to replace NAFTA. Both countries will commit to being transparent about their currency issues. Mexican Economy Minister Ildefonso Guajardo believes that transparent monetary policies will reduce any ambiguities associated with USD to Mexican pesos exchange rates in relation to forex or any ambiguities associated with the Mexican peso to dollars conversion in the context of business transactions. Transparency also makes it easier to resolve disputes over claims of currency manipulation issues. Guajardo envisions that currency transparency will set a new standard for international treaties.
6. Local Currency Swaps Reduce Foreign Exchange Risks
The Banco de Mexico plans to counter any declines to the peso through a strategy of local-currency swaps.The program, initiated in March, will enable financial institutions to buy foreign exchange at a weaker exchange rate than the present spot rate. The currency futures will be allocated to the central bank and upon expiry after a year, financial institutions will be allowed to pay in local currency for foreign currency. Local currency swaps will make it easier to buy Mexican peso, and up to $20 billion USD will be available for this program. The basic idea is to put a foundation under the peso and reduce the possible depreciation of the Mexican peso and centavos.
7. The United States Dollars to Mexican Pesos Exchange Ratio Increases the Mexican Peso’s Value
Currently, at the time of this writing, if you are a forex investor you may be interested to know that the value of Mexican peso (designated by the Mexican peso symbol Mex$ or $) in relation to the United States dollar (designated by the symbol USD or US$) is 1 united states dollar equals 18.89 Mexican Peso.
However, it’s important to keep in mind that the stronger value of Mexican pesos affects all sorts of other foreign exchange transactions, too. Mexican peso exchange rates will not only affect Mexican pesos to dollars but also the Mexican pesos rate exchange rate with the Dominican pesos. A stronger Mexican currency affects other issues, as well, ranging from national issues like monetary policies to quotidian transactions like the exchange rate of traveler’s checks–for instance, when tourists want to exchange dollars (USD) to Mexican peso or need Mexican pesos dollar exchanges.
THE INVESTMENT POTENTIAL OF THE MEXICAN PESO
Although there are many factors that affect currency exchange rates, the revitalization of the Mexican Peso is the story of how the Mexican government and central bank orchestrated dramatic positive change. They revisited economic opportunities, stabilized factors responsible for a stronger currency, renegotiated US-Mexican trade deals, and buttoned up enigmatic monetary policies.
In closing, let’s reflect on what a stronger Mexican Peso means for investors, corporations, and consumers:
- The peso and centavos (1 peso is worth 100 centavos) appear destined to prove far more enduring than the Mexican nuevo peso, which was in circulation from 1993 to 1996.
- The price of imports in Mexico will fall. This, in turn, will improve the country’s living standards. Both corporations and consumers will now pay lower prices for imported goods. The corporate sector dependent on imported raw materials will have lower costs and consumers desiring luxurious imported products will enjoy greater purchasing power.
- The stronger peso is an incentive for exporters to look for savings in efficiency and increases in productivity. Exporters can also diversify and consider less price responsive exports with more added value. By contrast, when the peso was weaker, it discouraged efficiency–because there was simply not enough of an incentive to be as efficient as possible. As a result of a stronger currency, Mexico’s economy is poised to experience many long-term benefits.
- A mightier Mexican peso will reduce the pressure on the economy caused by inflation. An appreciation in the Mexican peso prevents or reduces domestic inflation. Mexico’s emerging market economy will flourish because merchants will find it cheaper to import raw materials and finished products.
Here at Treasury Vault, we can always help you figure out the dollar to Mexican peso foreign exchange rate, provide information on how to buy Mexican peso, and help with providing any other financial knowledge you need for choosing the best currencies for long-term investments.