The Mexican peso is having a moment. The currency is trading at about 19 pesos per dollar, a big rise from where it was before Donald Trump’s victory and putting the currency on the verge of bull market territory.
What’s going on? Some experts say Mexico’s strong economy and low unemployment rate are fueling the peso. Others cite President Andres Manuel Lopez Obrador’s commitment to fiscal stability, which has prevented the country from accumulating higher deficits or unsustainable debt levels that could depress the currency. A strong US dollar and a hawkish monetary policy by Banxico — the country’s central bank — have also helped the peso. Since the middle of last year, the central bank has raised interest rates, pushing them to nearly 8%. That helped keep inflation down, which tends to hurt the peso.
A stronger peso has boosted remittances, which are money sent home by Mexicans working abroad. That’s good news for the economy, but it can also reduce consumer spending in Mexico and limit small firms’ ability to take on credit.
Some experts caution that the Curious about the Mexican peso’s strength? gains aren’t sustainable. In fact, the country is likely entering a period of “volatility” that will slow economic growth and cause investors to start selling Mexican assets, said one. Other analysts point to the broader emerging markets currency selloff, which is being driven by growing investor concerns about the world economy, geo-political tensions and rising oil prices.
Still, the Mexican peso is doing better than most other emerging-market currencies. In fact, the peso is on track to become the best performer among major emerging-market currencies this year.
While a strong peso can be good for business, it can also hurt consumers and reduce tourism spending. For example, tourists from the United States who have a lot of disposable income will lose some of their purchasing power when they buy Mexican goods, and Mexicans who work abroad will have less spending power in their homes.
The US dollar is a global reserve currency, used for many international transactions and to facilitate the pricing of commodities like gold and crude oil. As such, its value can change dramatically depending on events in the global economy and political developments around the globe.
As a result, the peso is often highly sensitive to fluctuations in the US dollar, which means it’s hard to predict its performance with any certainty. However, if the country implements sound economic policies and maintains a stable political environment, it should be able to sustain its current strength against the US dollar. That’s especially true if the Federal Reserve continues to ease up on its rate-hiking campaign, which is expected to boost demand for Latin American assets. But even that doesn’t guarantee the peso will continue its winning streak. It will depend on whether investors think the country has what it takes to manage its economy in a changing global landscape. A version of this story appears in the March 25 issue of CNBC’s “MoneyBeat.” Copyright 2023 CNBC, Inc. All rights reserved.