In the current essay I would like to examine Mexican peso and provide an analysis of this currency against U.S. dollar. To begin with, it should be noted that nowadays, when the industrialized economies are in recession, the interest in the assets confined to the emerging markets, which economies made a great leap forward for the past decades. Although these assets tend to be somewhat volatile, its return is often worth it, because as a rule, the funds, which operate in emerging markets, have brought a much higher interest rates on capital than conventional benchmarks.
It should be noted that by the beginning of 2006 the U.S. dollar at the auction reached the lowest level since September 2003 against the Mexican peso. Rate was 10.7700 pesos, which was 0.4% below the previous figure. As a fact, this situation was critical for Mexicans exporters, whose revenue was significantly decreased. Consequently, in April 2006, monetary authorities in Mexico were trying to curb the strengthening of the national currency and the peso has risen in price against the dollar by 7%. It can be said that by the beginning of 2007 for one U.S. dollars auctions gave almost 11.5 pesos, as stated in Mexican currency, monetary policy and financial systems – BANXICO.
However, with the beginning of World economic crisis in 2008 and a huge external and domestic debt of the United States, which in the long term will only grow – the dollar began to sink and Mexican peso again significantly increased in the relation to it – about 10.5 pesos per U.S. dollar. Of course, the exporters were unhappy, because national currency was rising in price and “eat” their part of the profits. Moreover, exporters began to blame high interest rates of the Central Bank of Mexico, which in turn, tried to made attractive conditions to the foreign investors, in particular investments in Mexican securities (for example the financial division of General Electric and the government of Canadian province of Quebec), especially from the United States, decided to issue the bonds, which were denominated in pesos. As a fact, the interest was so great that after the collapse of U.S. dollar, the value of Mexican currency increased gradually, as described in Mexico’s monetary policy framework under a floating exchange rate regime.
Consequently, since the December of 2008, the Bank of Mexico began to reduce the currency rate and yield on government bonds also went down. As a fact, this step gave the result – in anticipation of another rate cuts it has reached minimum – 8.16% per annum for securities maturing in 2014. However, it can be said that in 2009 Mexican monetary authorities do not really interfere with the peso strengthened, but Bank of Mexico is determined not to stop, as stated in Mexico: 2006 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion.
As a fact, Mexico suffers not only from the stagnation in the American economy. Also, the course of peso against dollar behaves almost the same as the course of dollar to the euro, which fell more than 20% in 2010. However, many analysts believe the Bank of Mexico is able to keep inflation under control (goal of the bank is 3% per year), only by raising interest rates. The economy meanwhile is still weak, and the tightening monetary policy could delay its recovery. The Bank of Mexico declared that it may hold foreign exchange intervention in the case of disorder on the market, which will lead to an increase in inflationary expectations, as described in Latin America Enters Currency War.
It is essential to note that Mexican monetary system can be characterized by organization of trade-weighted exchange rate system, which means maintaining the stability of national currency against a basket of currencies, belonging to the largest trading partners of the country. As a fact, formation of the basket helps Mexico to defense freely convertible or a controlled-floating currency against sudden speculative fluctuations, which may damage the currency and the economy of the country, as stated in Mexico’s monetary policy framework under a floating exchange rate regime.
In other words, with the aim to protect the peso from strong market fluctuations, it was introduced a trade-weighted basket. Recently, the central bank eased monetary policy substantially, as interest rates have been the focus markets. However, taking into account consumers’ concerns and producer’ prices, along with the overall industrial production, the Bank of Mexico has a tendency to act like the U.S. Federal Reserve, raising or lowering interest rates when adjusting its monetary policy. However, it should be noted that during the whole analyzed period, the Bank of Mexico successfully reduced the course of peso against the U.S. dollar. All in all, today the official exchange rate of the peso against the U.S. dollar is traded in a corridor from 12.391 to 12.4355 pesos per dollar, which guarantees stable income for exporters of the country.
Agustín G. Carstens y Alejandro M. Werner. 2010. Mexico’s monetary policy framework under a floating exchange rate regime. 12 June 2011. <http://www.imf.org/external/pubs/ft/seminar/2000/targets/carstens.pdf>
Mexican currency, monetary policy and financial systems – BANXICO. 2010. 12 June 2011.<http://leeiwan.wordpress.com/2006/11/16/mexican-currency-monetary-policy-and-financial-systems-banxico/>
Mexican New Peso to US Dollar Currency Exchange Forecast. 2009. 12 June 2011. <http://www.forecasts.org/peso.htm>
Mexico: 2006 Article IV Consultation—Staff Report; Staff Statement; Public
Information Notice on the Executive Board Discussion. 2006. International Monetary Fund. 12 June 2011. <http://www.imf.org/external/pubs/ft/scr/2006/cr06352.pdf>
Latin America Enters Currency War. 2010. 12 June 2011. <http://www.forexblog.org/2011/01/latin-america-enters-currency-war.html>