MEXICAN PESO

The peso is a currency that offers potential for trading more than ever. Mexico’s economic
profile reflects a growing potential. Its GDP is now nearly $900 billion, and Mexico
may overtake Canada in GDP. Mexico is the world’s fifth largest oil producer and ninth
largest oil exporter. Pemex, Mexico’s monopolistic oil company, generates an estimated
35 percent of federal government revenues. The OECD projects a GDP growth in Mexico
of 3.5 percent in 2007 and 4 percent in 2008. Importantly, inflation is projected to be just
above 3 percent (www.oecd.com).
Also important in understanding the dynamics of Mexico’s economic growth is the
impact of China. China is a competitive threat to Mexico, and as it grows, Mexico’s manufacturing
and export business have suffered because of China’s advantage in its low cost
of manufacturing and assembly due to the lack of a float of its currency.

The peso’s value will also tend to be supported by its relatively high interest rates,
which are now at a level of 7.2 percent, but lower than previous highs of 8 percent.
Additionally, the peso is strengthened by its ability to attract capital flows. It is useful to
note that those traders who sell the U.S. dollar and buy the Mexican new peso (MXN)
in the USDMXN pair, receive interest rate payments. So the peso can be used as a carry
trade currency pair. The second major factor is the U.S. economy. Mexican exports are
at a level of over 80 percent to the United States, and there is a high inflow of capital
coming from Mexicans living in the United States.
Oil also needs to be considered. Like Canada, Mexico is a net exporter of oil and
attracts petrodollars. A major negative factor is business confidence. The Mexican business
climate is often marred by inefficiencies, and the political economy generates a great
deal of negative sentiment. Another factor emerging is Asian competitiveness. As countries
such as Vietnam and others in East Asia are emerging as low cost manufacturers,
Mexico’s comparative advantages in world trade suffer.

From a fundamental point of view, there are many risk factors impacting the peso’s
direction. If Mexican interest rates fall, the peso could weaken substantially; if the U.S.
economy slows, Mexican growth will suffer. Based on this fundamental picture, trading
the Mexican peso should be considered mainly against the dollar, and trading this pair
using longer-duration charts is more advisable .




By ABE COFNAS