Mexican Peso To Us Economy: Us Recovery And The Peso Opportunity

The Mexican economy has the advantageous location of being the largest consumers' neighbor

. Thus, any changes in consumer demand have almost an immediate and perceptible impact on the health of the Mexican economy. The health of the economy, quite naturally affects the value of the currency, which in this case is the Mexican Peso. With the onset of the US recession, the export demand in the Mexican economy plummeted and with it the Peso lost nearly 18% of its value.

The sudden drop in exports led the budget deficit to swell as taxes fell and the need for expenditure toward stimulus increased. 80% of Mexico's exports are to the US and with US consumptions shriveling due to the recession, Mexico was hard hit by the recession. Faced by the hazard of declining exports leading to a constrained economy, Mexico saw a drop in its credit ratings as awarded by Standard and Poor and Fitch.

The sensitivity of the Mexican Peso to the state of the US economy is evident from the steep losses posted by the Peso and the Mexican stock markets on Wednesday due to a drop in US housing starts and US retails sales for December. Effectively, this means that the condition of the US economy is not as good as it had appeared to be and demand for Mexican exports may not pick up as expected. Thus, the Mexican economy may not experience the expected growth and a fall in Mexican stocks and the Peso is reflective of that.

The dependence of the Mexican economy on the US economy is evident from the fact that it contracted 7% in 2009 due to the recession in the US. While, this left the Peso cheaper by nearly 18%, Mexican stocks also tumbled. Both, the Peso and Mexican stocks appear to present an opportunity worthy of investment. The Mexican stock index is nearly at an 8% discount to the Brazil's Bovespa, whereas it has traded at a premium in the past. This clearly suggests that there may be an opportunity waiting to be tapped.

The steep and rapid changes in the value of the Mexican Peso and the nation's stock markets suggest that any entry into either of these two needs to be well timed such that buying happens at the lowest points. While, profit booking can be done on positive spikes, the real upside potential may lie in a wait and watch approach as higher gains are likely to be linked to a stronger recovery of the US economy, which may still take some time.

The fate of the Mexican economy is also linked to crude prices as crude oil is the nation's largest export. Proceeds from crude oil exports fund nearly 38% of the nation's budget. Crude prices have firmed up to around $79 per barrel, which has added some upside to the Mexican economy. However, a strong US recovery is what will finally propel the Mexican economy and its currency and stocks. Thus, negative spikes in both, Mexican currency and stocks seem to present an opportunity worthy of close evaluation at this point of time.

by: Pete Migz

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