On October 3, the dollar reached its highest level against the peso in just over 5 months. The exchange rate ended at 17.97 pesos per dollar, according to the Bank of Mexico, although according to other sources, the exchange rate closed above 18 pesos in interbank operations.
In any case, the closing levels seen this Tuesday have not been observed since the end of April, which confirms the pressures against the peso at this time. Even the worrying thing is that the exchange rate practically rose in two days from levels of 17.5 pesos to 18 pesos. The fit is relevant.
Since August of this year, when the depreciation of the peso began after a period of strong appreciation (practically the entire six-year term), The peso has accumulated a fall of 6.52 percent, although its balance for the year is still positive with an appreciation of 7.67 percentLet us remember that it appreciated up to 13 percent at the time of greatest strength for the local currency.
What causes the depreciation of the peso and what could be the consequences for the Mexican economy?
Uncertainty is the name of the game
Uncertainty around the United States economy has deepened in recent days; In fact, it seems that investors are not sure what the US central bank will do, as inflationary pressures persist, are lower but still in force. There is no shortage of people, even within the Fed, who continue to debate whether or not the organization should accept an inflation target level higher than 2 percent, although everything indicates that this will not happen.
But the debate continues; In recent days, some data was released that indicates that at least one more increase in the Fed’s reference rate will be necessary, probably at its meeting next November.
Additionally, rates are likely to stay high for longer than expected; In the first instance, the possibility was contemplated that at the beginning of the following year the Fed would begin to cut its rate, but now it is considered that it will not do so at least in the first quarter of the year.
All of the above, considering that no unforeseen event occurs that will deteriorate the scenario and further rate adjustments are necessary, or that they last longer at current levels.
The Fed is currently trying to lower inflation expectations, but indicators indicate that prices will not converge towards 2 percent annually in the short term, which is something that has plunged the markets into uncertainty, causing a reorientation. of investments in search of greater security, something that directly benefits the dollar and impacts other currencies such as the peso.
Consequences of weight loss
The consequences of weight loss, especially if it extends over time, can be diverse.
Let us remember, first of all, that the peso is emerging from a very important appreciation process; after the historic fall recorded in March 2020 with the start of the pandemic, which took the exchange rate to a maximum for the dollar of 25.13 pesos, The Mexican currency appreciated constantly until reaching a minimum for the dollar of 16.6730 pesos per dollar.
On several occasions, we have referred to the fact that the appreciation of the peso was linked to predominantly external factors, which suggests that these factors are changing, or have already changed.
Therefore, if the appreciation of the peso generated several benefits, it is logical that a reverse trajectory will now reverse these benefits and turn them into negative consequences.
ANALYSIS: The ‘counterattack’ of the dollar against the peso is coming
1. Inflation
The decline in inflation in the previous months can be explained in part by the excessive strength of the peso, which stopped generating external price pressures. Now that the peso has weakened, these pressures are likely to return and inflation could rebound.
2. Financial volatility
Volatility in the country’s financial indicators could rebound, impacting the stock market in particular, and of course interest rates.
3. High rates
To maintain relative exchange stability and deepen the fight against inflation, Banxico had to raise interest rates in recent months; it is likely that it will now have to maintain those rate levels, or even raise them further.
The exchange rate parity left the superpeso era behind, probably for a long time, today the conditions are different and on the horizon there are more difficulties for the Mexican currency before it can improve.
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