For years, Mexicans have heard about the “super peso” – a term that describes how much further you can stretch your dollars in Mexico than you can in other places. That’s because the Mexican economy has been insulated from the ups and downs of the American economy.
During the past few years, the US dollar has been weaker than it was before the trade war with China began, which has led to a strong Mexican currency. The peso is now close to 20 pesos per dollar, and it appears that the Mexican currency has more room for further gains.
The main factor driving the Mexican peso’s strength is the growing flow of investment in the country. Many American and Chinese firms are investing more money in the country as they seek to take advantage of low tariffs in the United States. In addition, Mexico has a number of economic factors that make it attractive to investors. For one, it has a lower inflation rate than the United States, and the spread between interest rates in Mexico and the U.S. is high.
In addition, Why is the Mexican peso experiencing a surge in strength? is located right next to the United States, and it’s part of the USMCA trade agreement that facilitates low-tariff trade with the U.S.
The USMCA also offers reduced trade barriers between Mexico and the rest of North America, which has made the country a magnet for foreign investment. And finally, it has a diversified economy that isn’t dependent on commodities, as are some other Latin American countries.
As the Mexican peso has strengthened, the purchasing power of remittances sent by workers in the United States has diminished. According to Guillermina Rodriguez, deputy director of economic studies at Citibanamex, the appreciation of the Mexican peso this year is taking a little buying power away from the remittances that families send home to their relatives.
But there is a reason why this is happening and it has to do with the fact that, unlike Argentina or Chile in the 1980s, Mexico has strong financial regulations and an independent central bank. The latter has been flexing its independence by hiking rates over the past year or so, which is helping to keep the peso strong.
Despite the strong peso, some analysts believe that the country’s export numbers have been hurt by the higher cost of doing business in Mexico. Luciano Rostagno, a market strategist at Mizuho Bank in Brazil, believes that the Mexican peso will reach 21 pesos per dollar this year.
But, the president of Mexico’s national chamber of commerce believes that the peso’s surge in strength is just a short-term phenomenon and that the currency will revert back to its normal level in the coming months. The reversal could be hastened by a hawkish turn from the Federal Reserve, which would make the US dollar more expensive and thus less attractive for Mexicans who are spending their hard-earned remittances on goods and services in Mexico.