Mexico: How to explain the mystery of the strong Peso?

Mexico pays a yield of 8.14% on its Cetes of 182 days, compared to a rate of 0 paid by Europe; 2.50% of EU;4.35% from China, and 6.50% from Brazil

How to explain the strength of the peso against the dollar? The Mexican currency closed yesterday at 19.19 per dollar. This is 38 cents above the 19.57 with which it began in 2019 and also above 20.36, corresponding to the first business day of the AMLO government.

The peso has remained firm, surprisingly, despite the adjustment in the growth forecasts of the economy;of Trump’s threats; of the warnings of the rating agencies and of some controversial announcements in public policies, such as the cancellation of the airport and oil auctions.

The strength of the peso is surprising, but not inexplicable. The high interest rates of Mexican government debt instruments appear as the “cause” most mentioned by the experts to explain the stability / strength of the peso.

What do you mean high rates? Mexico pays a yield of 8.14% on its Cetes of 182 days, compared to a rate of 0 paid by Europe; 2.50% of the United States; 4.35% from China and 6.50% from Brazil. These yields have been a determining factor in attracting foreign investment in government securities denominated in pesos and propping up the Mexican currency. As of March 22, 2019, foreigners had 2.2 trillion pesos in Mexican debt, 4.63% more than in December 2018.

In other words, foreigners have 230 billion pesos more of Mexican debt in their portfolios than they did three months ago. It is a lot of money, but it does not imply a change of trend. Foreigners are holders of 32% of the Mexican debt in March 2019. This is a similar percentage to the one they had a year ago. *

Should we settle for the explanation of high rates? I do not think so. Attractive rates serve to explain much of what happens, but not all. There are countries that offer higher rates than Mexico and that is not enough to prop up their currency. Two relevant cases are Argentina and Turkey.

Argentina offers a 58% rate on its government debt and, with that, barely enough to guarantee the stability of its currency, among other things because it has a very high inflation. It was 47% at the end of 2018.

Turkey has a rate of 24%, the highest in a decade and, despite this, can not avoid the “speculative attacks” against its currency, the Turkish lira. Investors massively exchange liras for euros or dollars because they doubt the autonomy of the central bank and the commitment of President Erdogan to the balance of public finances.

Is there a lesson for Mexico from Argentina and Turkey? Yes. The strength of the currency is good insofar as it reflects confidence in the country, on the part of the international community. The Mexican peso has remained stable because foreign investors like high rates, but above all because they value that these yields occur in a country where there is an autonomous central bank and a responsible macroeconomic policy, by the SHCP. Autonomy serves to keep inflation at bay. The responsibility is expressed in the government’s commitment not to spend more than what is paid. There is no mystery in strong weight and there are only high rates. We better not forget it.

* The data is from a work by Estephanie Suárez and Eduardo Huerta, published today in El Economista’s Economic Thermometer.

Source: El Economista

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