For 10 of the last 12 months, the Mexican peso has romped all over the dollar. However, the tide has started to turn in the last two months.
There are three great headwinds that the Mexican peso is facing right now: the economic slowdown in the U.S.; the political uncertainty that’s starting to brew and the drop in oil prices.
Let’s delve into that a bit further and I’ll show you what I mean.
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Let’s start with the economic slowdown in America. The non-farm payroll reading went from a previous reading of 431,000 additional jobs created to the latest reading of a loss of 125,000 jobs. Now that’s a big difference.
With the census jobs wearing off and the mortgage incentives coming to an end on top of this, it’s really starting to shake up the public once again (and it should shake them up).
Also, in addition to the latest jobs numbers and worse housing numbers, the consumer confidence number and the retail sales data both came in worse than expected, too.
You’ll recall last week that I told you that global shipping rates are falling because of a slowdown in global trade, too. So this doesn’t look good for the U.S. or the global economy, either.
But with just the U.S. picture alone growing bleak, that’s enough to bring down the economic climate in Mexico. Why? The United States buys about 80 percent of Mexico’s exports.
If the United States is doing poorly economically, then they have little need for Mexico’s exports. That would mean that there would be less money flowing into Mexico. That alone would bring down the peso in relation to the dollar by the lack of dollars being sold and bought into pesos in order to do business in Mexico with their exporters.
For instance, one of their biggest exports is oil (No. 3 on our list of headwinds above). If the U.S. economy is slowing down, it requires less fuel than it did when it was growing.
Therefore, that means that the U.S. would need fewer barrels of oil per day from Mexico.
We know that the global economy is slowing down because of the recent peak of oil in April (which also coincides with when U.S. stocks peaked as well). Also, Mexico’s Mexbol has recently peaked and sold off as well.
In fact, once that index drops below the 30,000 mark (which won’t be long since it’s around 31,300 now), the downward spiral will speed up and even more money will run away from Mexico and its peso and into the dollar and other defensive plays.
So the slowdown in the U.S. economy and the recent dive in the price of oil (one of Mexico’s biggest exports) are two hindrances to the peso right now.
However, there’s another one brewing. It’s the political uncertainty that is emerging that wasn’t there a year ago.
You see, Mexico’s largest opposition party ruled the country for 71 years. However, they’ve been out of power for the last decade. But that may be about to change soon.
There are some near-term elections for their governorships that could help to turn the recent tide. There are many that think that the opposition party could win enough governorships to help their party gain some momentum going into the 2012 elections.
If there’s one thing that a currency hates, it is political uncertainty.
With stocks diving in the U.S. and Mexico … with oil diving due to the U.S. and the global economies slowing down … and with political uncertainty brewing right now, it’s the perfect setup for investors to flee the peso and run to the defense of the world’s reserve currency in times like this.
Therefore, this emerging-market currency is going to be in hot water for a while to come.
About the Author: Sean Hyman
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