Mexico adopted a floating exchange rate regime in 1995, a consequence of the crisis. In a floating exchange rate regime, if the capital account surplus matches the current account deficit, the currency should be stable.  If the current account deficit exceeds the capital account surplus, the currency should depreciate.  Conversely, if the capital account surplus exceeds the current account deficit, the currency should appreciate.


Over the long-term, the relationships hold true.  On any given day, however, the exchange rate doesn’t necessarily reflect the underlying fundamentals of the economy.  The peso’s abrupt plunge and climb over the last six months certainly doesn’t respond to changes in the underlying fundamentals of the economy.  The fix rate went from a low of $11.57 in July 2011 to $13.95 at year-end to a low of $12.64 in February 2012.  This year alone, between January 2 and February 7, the fix rate dropped from $13.93 to $12.65. 


However, the dynamic driving the current and capital accounts does give some pause. In the former case, it is oil; in the latter, foreign investment in money market obligations.