WHY IS THE MEXICAN PESO SO STRONG, AND WILL THIS TREND LAST FOR THE LONG RUN?

Why is the Mexican PESO so strong against the US Dollar, and will this trend last for the long run?

The relative strength or weakness of a currency against another is determined by various factors, including economic fundamentals, political stability, monetary policy, and market sentiment, among others.

Regarding the Mexican Peso (MXN) and the US Dollar (USD), the MXN has been relatively strong against the USD in recent years. This strength is mainly due to several factors, including Mexico's strong export performance, a stable political environment, and prudent macroeconomic policies.

Mexico is a major exporter of goods – particularly to the United States – which is its largest trading partner. A strong export performance has resulted in a robust current account surplus, which has helped to support the MXN's value. Moreover, the country's political environment has been relatively stable in recent years, which has boosted investor confidence and reduced the risk premium associated with the MXN.

In terms of monetary policy, the central bank of Mexico (Banxico) has implemented a credible and consistent inflation-targeting regime, which has helped to anchor inflation expectations and stabilize the currency. Additionally, the central bank has maintained a prudent monetary policy stance, keeping interest rates relatively high to attract foreign investment, which has supported the MXN's value.

As for whether this trend will continue in the long run, it is challenging to predict with certainty. Various factors could affect the currency's value, including changes in global economic conditions, fluctuations in oil prices, and shifts in monetary policy, among others. However, if Mexico continues to implement sound economic policies and maintain a stable political environment, the MXN could remain relatively strong against the USD in the long run.

Factors to consider that could affect MXN performance in the short run depend on global economic news and internal political scenarios. The financial conditions of the world economy and the 2024 Mexican Presidential Election are clear developments that could spur volatility in the markets. Historically, volatility is something the MXN doesn’t like to deal with.

Sincerely,
Nestor Hernandez
Portfolio Manager