Mexican forex investors are in luck. Those who took positions in the peso against the US dollar (usd/mxn) have obtained more than 8% profitability thanks to the fact that the peso is already crossing around 18.5 units (the pair was around 21 units a year ago ).
Forex trading or currency trading sometimes it benefits the brave and this seems to be one of those occasions. The peso benefits these days from its relatively high interest rates, a strict fiscal policy and the benefit of its proximity to the United States, with all that it means to attract investment and capital.
In mid-March, the usd/mxn pair is a true reflection of how the peso has become one of the great bets of this 2023. As a reference, its level already reflects a full recovery from the lows of the pandemic for the Covid-19.
As a reference, the usd/mxn and its 8.5% clearly beat other currencies such as the South African rand (7.5%) or the Brazilian real (2.4%) in the same period of time.
The carry trade plays in favor of the peso
As we talk about Forex trading we have to talk about the carry trade and how it is a current that plays in favor of the Mexican peso at the moment. The carry trade is that operation that consists of borrowing money in a currency with low interest rates such as the US dollar (despite recent rate hikes) and buying assets denominated in another currency that offers higher returns (higher interest rates). tall).
In the emerging markets of Latin America, capital leaves the dollar to cross the southern border and take refuge in the peso. Thus, it is the US capital itself that supports the revaluation of the usd/mxn these weeks in Forex trading. And it is a current that has come to stay for a while, because in addition to the carry trade, there are other reasons that suggest that the peso will remain strong in the medium term.
A strong weight for a while
When we talk about emerging markets, a point in favor of Mexico is its proximity to the United States or nearshoring, with all the commercial advantages that this brings to the Aztec country. But it is that analysts consider that Mexico presents an attraction in several additional aspects, both national and international.
For example, Mexico, the United States, and Canada have a free trade agreement, the USMCA, and it benefits from some aspects of the new US policy contained in the US Inflation Act. Briefly, the countries neighboring the US are considered markets where you can invest as an American with the advantage that it is not considered a violation of that commercial policy of protection of national investments.
Mexico therefore benefits from certain subsidies that reach the country from the US to its automobile industry, for example. It is convenient for many American companies in the sector to assemble in Mexico because the wages are lower.
And since we are in a moment of change in the industry at an international level, as electric motorization is being promoted over combustion, Mexico is postulated as a great alternative, due to its low wages and because the USMCA considers it a friendly country and where US Inflation Act subsidies are not lost.
Examples of these benefits for Mexico and Forex trading in the usd/mxn are the recent corporate decisions of the German BMW and the American Tesla.
BMW has confirmed that it will invest 800 million euros to expand the production of electric vehicles in Mexico and Tesla announced that it intends to build a factory in the north of the country that would mean an investment for local coffers of about 5,000 million dollars, one of the largest in recent years.
The discreet appeal of the Mexican market
Little by little, and without making noise, the Mexican market has become a focus of attention for international capital. According to data from the ministry, direct foreign investment reached 35.5 billion dollars in 2022, the highest level since 2015. And 12% of all that figure came from manufacturing associated with transport.
A second engine of income in foreign currency has been the transfer of money from Mexican migrants living in the US So much so that capital transfers from the US now account for close to 4% of Mexican GDP. And they continue to grow.
The latest data available is for the month of January, and then despite everything they grew by 12.5% compared to the data for the same month of 2022, according to the statistics of the Bank of Mexico.
And it is that Banxico has been tougher in its monetary policy than other neighboring countries. The entity began to raise interest rates back in 2021, nine months after the US began to raise its rates and has already raised 14 consecutive ones. The official price of money in Mexico is 11% from that initial 4%.
Thus, the carry trade, so important for Forex trading, means that the differential between the fed funds target rate has gone from 3.75% to 6.25%, which has weighed heavily on the growing attractiveness of the USD. /mxn in international markets.
In addition, although analysts continue to expect new rises in the northern neighbor, they also expect them in the peso, which would keep the peso active in Forex trading in the medium term. And all because inflation is not contained and the market is betting on high rates in the United States for a longer time.
A policy of fiscal austerity
Another aspect that has increased the attractiveness of the Mexican peso in Forex trading is the fiscal austerity policy implemented by the government of Manuel López Obrador. AMLO may be a populist and somewhat controversial ruler, but he has cut public spending and run some small deficits.
These decisions contrast with those of some neighboring governments, which have relaxed some economic decisions and have shown less interest in an austere fiscal policy, such as those of Colombia or Brazil.
Of course, Forex trading does not see everything with good eyes. Money has a memory and knows that, despite these financial currents currently in favor of the peso, the Mexican economy has not reached growth forecasts for decades.
López Obrador reached the government in 2018 and since then the economy has hardly grown if compared with that of other countries in the area. Despite everything, growth forecasts for 2023 are barely 1.2%, according to a Banxico survey.
AMLO has done some good things, as Forex peso trading acknowledges, but not all. Many have been left unanswered and they are challenges for the long term. As some analysts say, if López Obrador had had a long-term strategy to boost investment, the country would have benefited before the nearshoring.
And now that?
Fundamental analysis suggests that the trend will continue. Rising rates in the United States will not stop the usd/mxn because they will also rise in Mexico. However, analysts pay attention to the level of 17 units because they are big words.
At the moment, Forex trading on the usd/mxn stands at 18.5 units and offers interesting returns. At twelve months, the highest point in the usd/mxn exchange rate has been 17.89 units, with 21.05 units as the lowest point.