Monday, June 22, 2015

Mexico - peso to rebound in value?

The Mexican peso (MXN) has been quietly but steadily depreciating in value in relation to the
 US-dollar (USD) for the last several years. In May 2011, the peso traded at 11.65 MXN to the USD. By June 2014, it further declined to 13 MXN. Over the last 12 months, a further 15 percent drop in value for the peso to the 15.3 MXN range reflecting a recent trading day quote on June 22, 2015.

Why the drop? In our view, this has more to do with a very strong USD over the last year year coupled with  a dramatic decline in the world oil price. As Mexico is a large oil producer, it is implementing policies to modernize and allow for foreign investment into the industry to help foster increased hydrocarbon production going forward.

Mexico today is doing quite well on many macro economic measures including low inflation at 3%, low Central Bank interest rates at 3%, growing exports and diversification of the economy. In fact, Mexico today is one of the world's largest exporters of electronic goods - primarily to the United States. Other major industries include auto production, now the largest producer in North America. The national oil industry is spearheaded by state owned Pemex. Tourism, telecommunications, transportation, mining and agriculture also are large contributors to overall GDP.

Some analysts have Mexico pegged to be one of the world's largest economies by year 2050 in a club with China, United States, India, Brazil, Germany, United Kingdom, Russia, Nigeria, Indonesia and France. How so? Mexico has had significant and steady population growth for over 50 years now. Recent estimates have the national population of Mexico at 120 million. The other country of significance similar to Mexico with skyrocketing population growth is Nigeria.

As measured by purchasing power parity, the MXN is currently 50% undervalued to the USD. The MXN is one currency to keep your eye on for a potential rebound in currency price valuation. Although historical risks remain such as episodes of high inflation's. political instability and currency devaluations, it is likely Mexico has now entered a new era of relative currency stability.

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