Mexico’s flexible exchange-rate policy is meant to act as a shock absorber, letting the peso take the hit rather than the real economy of jobs and output.
Ironically, this would seem to have proved so successful that there have been very few hits for the currency to take.
Currently, the peso is trading at $0.052 against the dollar. One month ago, on 7 April, it also traded at $0.052, and a year ago, on 7 May 2018, it stood at $0.051.
Trump casts cloud over currency
It is s similar story against the euro. Currently at €0.047, it was worth exactly the same a month ago, on 7 April, although a year ago it was notably lower, at €0.043.
And against sterling, the peso stands at £0.040, identical to its exchange rate on 7 April, and little change on the £0.038 that it was worth a year ago, on 7 April 2018.
True, the picture over the last five years shows a more dramatic movement against major currencies. On 30 May 2014, it traded at $0.078, on 16 May 2014 at €0.057 and on the same day at £0.046.
The depreciation of the peso over this period may be in part attributable to the surprise 2016 victory of Donald Trump, who is committed to scrapping the North American Free Trade Agreement (NAFTA), signed by Bill Clinton and covering trade with Mexico and Canada. NAFTA has been hugely important to Mexico, which needs strong economic growth to mitigate poverty and inequality.
Already President Trump has imposed tariffs on aluminium and steel from Canada and Mexico, and the two countries have retaliated. Mr Trump’s proposed alternative to NAFTA, a US-Mexico-Canada Agreement (USMCA), lacks support at present in the legislatures of the three countries involved.
Praise from the IMF
The president believes NAFTA has seen American jobs exported to Mexico, and has called it the worst trade deal ever signed. Critics retort that 12 million US jobs depend on the NAFTA deal.
In its most recent Article IV health check on the Mexican economy, published in November last year, the International Monetary Fund (IMF) said: “The Mexican economy has continued to exhibit resilience in the face of a complex environment. Output has grown at a moderate pace while inflation declined, although it remains above the central bank’s target.”
It added: “The flexible exchange rate has continued to be a key shock absorber. Fiscal consolidation is on track, monetary policy has maintained a tight stance, while financial supervision and regulation remain strong.”
The IMF expects growth of 2.3% this year, with private consumption remaining the key driver of growth, supported by manufacturing exports.
But there was a word of warning: “The strong presence of foreign investors leaves Mexico exposed to greater risk in terms of capital flows reversal and increased risk premia.”