Yesterday, Thursday afternoon, Moody’s Analytics issued a serious warning for the Mexican economy, noting that the country’s currency it could depreciate about 20 percent against the dollar in the coming months.
If the projection made by Alfredo Coutiño, an analyst at Moody’s who did the work, turns out to be true, the Mexican peso could be placed slightly above 24 units per dollar in the coming months. The maximum price that our currency would reach would be 24.06 pesos, considering yesterday’s closing of Banxico.
However, this price would be below the current historical maximum of 25.13 pesos per dollar, which our currency reached in March 2020 with the start of the pandemic.
The causes, according to Moody’s
According to the analysis made by the agency, the “monetary tightening”, that is, the rate hike campaign by the Fed, would be the cause of the adjustment of the exchange rate in Mexico.
“This correction could happen between the end of 2022 and throughout 2023, but it could even be delayed until 2024 depending on the speed of the monetary tightening cycle by the FED and the reaction of monetary policy in Mexico,” he projected.
Said adjustment would be a copy of what happened in the two most recent crises, that of 2009 and 2020, according to a model prepared by the rating agency.
From his point of view, an exchange rate correction in Mexico looks imminent based on this model that replicates the monetary conditions of the years 2009 and 2020periods of the most recent global crises.
But why, if the strength of the peso supposedly rests on the rate differential between Mexico and the United States, of 600 base points, will it now affect our currency?
what could happen
Moody’s analysis and warning draw attention, but let’s look at a few points to put what could happen in its true context.
1. It wouldn’t be the worst correction we’ve seen
As we pointed out, the eventual exchange rate adjustment anticipated by Moody’s would take our peso to a maximum of 24 per dollar, slightly higher, but nothing more. This price would be lower than the current historical maximum of 25.13 pesos.
In other words, the correction would be considerable if it materializes, but still below the “pandemic catastrophe”.
2. Consequence of the recession
A depreciation of the peso in the magnitude estimated by Moody’s, would be due to a recessive scenario in the United States, as the agency itself points out when referring to economic-financial and monetary conditions. It is evidently the confirmation of a bad expectation for 2023 in this region and in much of the world.
3. More inflation
For Mexico, if the depreciation materializes, inflationary pressures would be evident, since our country, as we know, is an importer of countless products. What a challenge that both Banxico and the government would face with the Inflation Package reloaded.
The foregoing also confirms that, at least, in the first half of the year the rates in both Mexico and the United States will not fall.
4. The peso gives battle to the super dollar, until now
Until now, the peso has withstood the strength of what is already called the “super dollar” in the world, and has even behaved very well for several years. We all know that it is due to the interest rate differential between our country and our northern neighbor. , a depreciation is up to a certain point normal, we will see if it will be in the magnitude expected by Moody’s.
5. Latin America, fragile in the face of slowdown
A depreciation of our currency would not be so surprising in the Latin American economic-financial context either.. The region will be, not to change, one of the hardest hit by the global economic slowdown that is already beginning to be felt, and an eventual recession.
6. Weapons against depreciation
However, the peso, and Banxico, have some mechanisms and tools at their disposal that could cushion an eventual depreciation, or at least an accelerated depreciation. One of them is related to Banxico’s international reserves; yet another is even linked to the Fed, which has mechanisms called swaps, to inject into the national and international exchange markets.
7. It will not be the first (nor the last) correction
Undoubtedly, the peso is and will be exposed to the storms caused by the global economic-financial context, a correction would change it would not be the first nor the only onewhat is relevant is that said phenomenon does not disrupt other indicators, or does not do so excessively.
With this analysis, the only thing that is not in doubt is that the crisis that the world is currently experiencing is very deep and very serious. It is best to stay cautious in our personal finances.
If interest rates in the United States continue to rise, they will continue to be attractive to capital. In the context of a recession, uncertainty would cause more investors to turn their eyes to the dollar and less to other currenciesespecially those in the emerging world.
The famous flight to quality would make its appearance again, as it has not done in all its magnitude for a long time.
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