The Mexican Peso (MXN) has been perhaps the strongest currency in the post-pandemic era, going from $4 US Dollars per $100 Mexican Pesos as the crisis started in March 2020 to shy under $6 US Dollars per $100 Mexican Pesos in the present, which is a 50 percent increase in three years, or around a 15 percent increase per annum. Around half of this increase was due to a stabilization of trade during the summer of 2020, as Mexican manufacturers regained productivity and exports flowed north as they did before. The other half has to do with the Bank of Mexico’s monetary policy response to the increased price inflation, which came earlier and stronger than the tightening by the Federal Reserve.
Unlike the Federal Reserve, the Bank of Mexico has a single mandate of price stability. The Bank of Mexico went from a target interest rate of 8.25 percent in mid-2019 to 4 percent in mid-2021 to 11.25 percent in mid-2023. It started tightening 8 months before the Federal Reserve. Today, it is possible to get a 13.5 percent return on a fixed term 1 year deposit and a 11.4 percent return on a checkable account denominated in Mexican Pesos. It is even possible to get a 7.5 percent return when holding Mexican Pesos in some American brokerage accounts. This return on liquid assets is considerably more attractive than the 5 percent return on the best accounts in US Dollars. The only question that poses a risk to potential investors is whether the Mexican Peso will maintain its value relative to the US Dollar.
Analysts at Goldman Sachs and Bank of America think that the Mexican Peso is overvalued, but at the same time say that it has room to become even stronger. My own analysis leads me to the conclusion that there is no evident factor in the horizon that would weaken the Mexican Peso in the short and medium terms. If we take a look at the balance sheet of the Bank of Mexico, we will see that net international reserves make up around 85 percent of the assets, the bulk of which are US Dollars, and the other 15 percent is credit to Mexican banks. Unlike most central banks in the world, the Bank of Mexico does not currently hold government debt. This effectively means that the Mexican Peso is 82 percent US Dollars, 3 percent Gold, and 15 percent low risk assets with a higher real return than those held by the Federal Reserve.
The financial structure of the Bank of Mexico alone indicates a stable strengthening path, but there are additional factors that are reassuring. The nearshoring trend that has only just begun has increased demand for local factors of production and increased the value of output such that the Bank of Mexico would have no reason to lower interest rates, even if the Federal Reserve were to loosen policy soon. Indeed, insiders have made public statements to that effect. Remittances continue to be strong as well, and the Big Mac Index indicates an undervalued Mexican Peso with the potential to regain the near parity it enjoyed during the first decade of the present century.
