USD/MXN: Inseparable Economies

Fundamental Analysis, fx trader, forex, USD, MXN, Inseparable Economies

22 Jun 2016

Unlike its fellow NAFTA partner Canada, the sudden shift in the US Fed’s outlook for Fed Fund rate increases may have been to the Bank of Mexico’s favor. Through NAFTA, the bulk of Canadian and Mexican exports are to the US and of that a lot of crude oil. Over 73% of Mexico’s exports are destined for US markets and 51% of imports originate there. That’s similar to Canadian bilateral trade with the US in general terms.

The difference, though, is that Mexico is not as heavily dependent on petroleum exports, in general, as is Canada. Only about 10% of total Mexican exports are petroleum related. Nearly 35% is manufactured machinery or electronics and another 24% is transportation; autos, trucks, rail, related components and some aircraft.

So like Canada, the Mexican economy is in very large part dependent on the health of the US economy1. Lastly, both the Canadian Dollar and Mexican Peso have weakened or have remained weak vs the US Dollar for a considerable time now. Having a weaker currency versus a main trading partner is a benefit and, again, both Mexico and Canada share in that respect. There’s one critical difference, however. Bank of Canada policy is directed at disinflation, whereas the Bank of Mexico’s policy has been directed at inflation. Had the Fed been in a position to raise its benchmark rate, the Peso would have surely weakened further relative to the US Dollar. It’s worth noting that on the other side of the coin, a Fed increase would have made any need for a BOC rate increase less necessary.

At the last BOM meeting2, 5 May, it maintained its target rate at 3.75%. It had last raised the target rate 50 basis points to 3.75% from 3.25% at the February meeting. Again, petroleum is a major but not leading Mexican export to the US. However, it does account for a significant portion of government revenue when all destinations are taken into account. The Chart demonstrates the correlation between Brent Crude and the USD/MXN exchange rate. The Peso reached its low of MXN $19.10836 vs the US Dollar on 11 February, 2016 just days after Brent Crude reached its 2016 low. Over the past 52 weeks, the Peso had weakened from a comfortable MXN $15.28566 vs the Dollar, 18 June 2015, to MXN $19.10836, 11 February 2016; a 25% decline. The Peso strengthened from there, along with the price of crude from the lows achieving its 2016 best at MXN $17.2017 on 2 May; a 10% recovery. It has since weakened in spite of stabilization in the price of crude. The Peso is currently at MXN $18.9815.

Fundamental Analysis, fx trader, forex, USD, MXN, Inseparable Economies USD MXN Price Event Chart vs BrentUSD/MXN price Event Chart