viernes, 24 de enero de 2014

What's going on with the peso?

The cost of a dollar hit a new high for the year today, January 24th. At $13.49, the fix rate is at its weakest against the dollar in 18 months.

What's going on? After all, a pathbreaking energy reform changing the Constitution was approved in December and S&P upgraded Mexico's rating to BBB+. Shouldn't the peso be appreciating? It's obviously not a change in Mexico's economic fundamentals that caused the peso to depreciate.

The answer to the conundrum lies in portfolio investment, we believe. The Fed began "tapering" this month. One hopes that it's the $500 billion default on an investment product in China that has investors rethinking their appetite for risk. Is the Chinese Government facing its own "Lehman Brothers" moment? If the Fed's reducing its asset purchases from US$85 billion a month to US$75 billion has caused the peso to lose 3.0% in just 24 days, we're in trouble.

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