The aggressive monetary policy of the Bank of Mexico – raising benchmark interest rate to an 8 year high of 6.75% in May – has driven the peso to its top mark of 18.3345 on July 6 against the U.S. dollar. Pablo Soria de Lachica, world renowned broker, discusses the recent hike. As the North American Free Trade Agreement remained unchanged, the peso tore up the ranks becoming the world’s best performing major currency this year, and reestablished its 20% downtrend for USD/MXN.
“The peso has had good momentum relative to other emerging currencies in recent months, and that could continue for some time longer,” said Morgan Harting, chief portfolio manager for all multi-asset income strategies at AllianceBernstein, a renowned asset management company, “And though it is no longer cheap, it also does not look expensive in terms of purchasing power parity.”
One of the prime reasons that helped peso skyrocket is the shift of speculative views on the currency. As of June 13, speculators increased the number of net-long contracts to 95,931, highest since June 2014.
“This is partly due to the changes in U.S. politics, and partly as global economic headwinds have dissipated somewhat – allowing carry trades to flourish again” said Ken Dickson, investment director at Standard Life Investments, a leading British asset management firm.
As long as the U.S. dollar remains stable to decline, the peso will continue to appreciate, even if the Mexican central bank starts lowering rates later this year.
However, as pointed out by Pablo Soria de Lachica, the recent hike of the peso carries a few risks as well. Federal Reserve Chair Janet Yellen’s announcement of reducing the balance sheet towards the end of the year can cause the U.S. dollar to rise, leading to depreciation of the Mexican currency. Also, the market is currently overcrowded, putting the peso at a slight likelihood of reversing at any hint of increasing risk. The inflation adjusted rate begins to lose its competitiveness as it climbs higher, making it difficult to sustain further gain past the important 18/USD mark.
Pablo Soria de Lachica is an internationally acclaimed broker, investment strategist and foreign exchange expert. An MBA graduate from Universidad Tecnológico de México, Pablo oversees numerous international transactions every year, using his 20 years’ worth of expertise to guide and educate clients on global economics and investing techniques. Presently, he collaborates with Kartoshka, a global leader in the development of the latest technologies in sales, telemarketing and customer support. Soria de Lachica is a vigorous supporter of environmental projects, actively involved in the local Boy Scouts and Delta Epsilon Sigma programs, and an avid contributor to various charity organizations including Bridges for Peace and the America-Israel Cultural Foundation.
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