The Struggling Peso – Blame it on Brexit

It has been a roller coaster ride over the first half of 2016 for the peso to dollar exchange rate. The volatility in worldwide currencies began the first of June 2014 and the peso declined steadily from about a 13:1 exchange to a rate over 19:1 in February of this year, or about a 46% change. This is my fourth update to this article since December of 2014.

This past week the peso hit a new low against the dollar reaching 19.40:1 momentarily on Friday, June 24. For travelers to Mexico, you can find big savings on certain segments of your trip. For those who earn in pesos, American products, from toilet paper to Chevrolets the prices have soared as much as 45% since June of 2014 and the second time this month.  

What has caused the peso’s decline?

To say the peso has declined is almost a misnomer. There is no doubt that a number of oil producing countries have had significant declines in their value against the dollar because of their economic dependency on oil revenues, Russia and Brazil being perhaps the hardest hit. Many Middle Eastern countries required an oil price over $75 a barrel just to balance their budgets. But nearly all major currencies have declined against the dollar since 2014, including the Euro, Indian Rupee, British Pound and even Japanese Yen. So, a better way to look at it is the dollar has risen.  

Since June of 2014, the value of the peso and most other world currencies have slipped against the dollar as a result of falling oil prices, China’s sluggish economy, general economic instability, particularly in Greece and Portugal. There is also the effects of economic warfare with Russia and Iran being the downside of that coin and Mexico being collateral damage. A stormy start to the first of the year in the Dow Jones Industrial Average caused the rise of the dollar in February. Seeking shelter in the strongest world economy, currency trading has caused the dollar to rise. But this time and the fall of the peso is a little different.

Blame it on Brexit

Since February of 2016 however, things seemed to be stabilizing and the peso recovered to a high of 17.18:1 May 1, 2016. Then along came Brexit.

This past week Britain voted to leave the European Union (EU) for a wide variety of reasons, from immigration concerns to the lack of confidence in other EU member economies. Unfortunately, this was probably a decision best not left to the masses. In the days surrounding the vote “What is the EU?” was the highest Google search in Great Britain, indicating interest, but the lack of knowledge in the gravity of the vote. But it is not yet a done deal and Britain still has time to backtrack.

Most world economists were in agreement that Britain’s departure would cause an upheaval in the world economic markets, how much and for how long was the debate. Britain is the second largest economy in the EU lead by Germany and followed by France, so this is a major change in the economic direction of all of Europe. Fueled by nationalist interests and immigration concerns, voters chose to leave the EU by a 4 point margin. It is not a done deal yet and although Scotland voted to remain in Great Britain just months ago there is a good possibility now Scotland will go independent, further reducing Britain’s economic clout. 

All this uncertainty has again made investors flee the stock markets and European currencies and the dollar rose dramatically as investors fled the Euro, Pound Sterling and most world markets the day following the vote in a near panic. The Mexican peso, completely unrelated to the situation, went from 18.12:1 to the dollar on June 23 to 19.4:1on June 24, the day following the vote. 

Here we are a week later and the markets are starting to shake off the shock, the price of the dollar is starting to ‘normalize’ and stock markets are gaining back some of the financial carnage. It is going to take months or even years before the real impact of Brexit will be seen.

So, unlike the original oil influences that started this exchange imbalance, today the general economic uncertainty is the reigning influence. And again, the Mexican peso is collateral damage.

Despite Mexico’s bright economic outlook of a growth rate more than double that of the United States the general panic brought the peso to lows against the dollar since 1994 when the peso was devalued when it hit 20:1 against the dollar. The US is Mexico’s largest trade partner and Mexico is the US’s third largest trade partner. So the dollar to peso relationship is critical to both countries.

The US presidential campaign has generated some hot air rhetoric over the Mexican-American relationship, but since it is just hot air, it is just as unlikely to have caused this recent downturn in the peso as it is to ever come to pass. Walls and the nullification of NAFT are unlikely to occur, and limitations on personal bank transfers would be virtually impossible. But should a new president try to limit Mexicans sending money ‘home’ a recent telephone interview with a Mexico City finance representative provided a counter plan to freeze ALL non-business cross-border transactions which would leave a couple of million US retirees in Mexico unable to access funds in the U.S. Back to the states is a long way to travel to pick up that social security check each month. 

Presidential campaigns historically generate currency volatility, particularly when a change in the White House occupant is a foregone conclusion. Look for the dollar to lose a little steam later this fall as markets anticipate regime change. 

So how do you benefit?

Not everything in Mexico will benefit from this currency issue. Major hotel chains and resorts still calculate their prices in dollars and look for their profit margins to soar, as they still pay their employees and local fixed costs in pesos. Mexico’s popularity as a tourist destination will increase again this year reaching a record 18.6 billion dollars in 2015. We have benefitted from that here in Baja, as Cabo San Lucas became the #1 tourist destination on the west coast of Mexico in 2014.

On the street level is where you will find your savings, even in tourist traps. So if you want to save on your next trip an all-inclusive destination is probably not the way to go. (Along with only providing you the climate of Mexico experience, not a real Mexico experience) I invite you to stray a little off the beaten path to explore the real Mexico and save money while doing so. Remain alert to your surroundings and read our article “Mexico Travel Warning in Perspective” and stay safe. 

Changing your money is where you win

It use to be that dollars were coveted almost where ever you traveled and you could do better on the street than you could at the bank. But today trying to pass dollars in Mexico is probably your worst bet. With the volatility of the peso, vendors are down right hosing travelers. It is very common to see 16:1 and 17:1 exchange rates posted at stores when the interbank exchange rate is 18:1 or even closer to 19:1, down right financial abuse. 

Best Bet: In 2015 all businesses must file taxes electronically and purchases over $2000 pesos (about $110USD) must be paid with a bank card. So today nearly every business has a credit card reader connected to the cellular network. Most credit card companies take the receipt charged in pesos and convert it to dollars at the interbank exchange rate or very close to it. Check with your bank before you leave to be sure they do not have an abusive fee for each transaction. The tip here, and even at home, is to check your charges regularly, even daily online to be sure you have not been double dipped or ripped off. Credit card fraud committed on tourists does occasionally happen where ever you travel and you need to report bad charges within 30 days for prompt action.

A second solution is to change your cash at home before you leave. This can be difficult because many banks do not stock peso and you may need to order them. It also leaves you traveling with a big wad of cash. 

Casas de Cambio or Exchange Houses are for tourists and they know it. On a recent trip through the Cabo San Lucas airport at the end of April, when the peso had climbed to its best mark this year, the Exchange Counter at the Cabo San Lucas airport was garnering more than 12% on your transaction. Today here in Tijuana the exchange rate at the houses is about 4% over IBX. So know your IBX, we have a live feed on the right of this page and on our weather pages.

Mexican banks have curtailed currency exchange and you may find it very difficult to do unless you hold an account at that bank. You are required at many banks to deposit the funds in dollars and withdraw pesos. (The reverse if you hold a Mexican dollar account) 

As stated above, changing on the street is likely to leave you a loser in the exchange game with the exception of some supermarkets, OXXO quickie marts, and a few other locations. Remote locations will ding you hard, as they have to drive to the bank to exchange. Pemex stations I have observed to be particularly abusive. 

Traveler’ Checks, do they still sell them? They’ve never been very popular in my observations here in Baja, I don’t know about the major cities of Mexico. I’d look for another solution when traveling to the Baja peninsula.

Wrapping it up

Mexico is on sale for Expat retirees and travelers earning in dollars and today, even in Canadian Loonies. But just like any sale, it is how you shop. If you play the game wisely you can save as much as 40% right now with your dollar income. 

In the long run, we should all hope our neighboring currencies begin to move closer so that US exports can grow with Mexico and currencies can become more stable. If the situation is not brought into line it will become a greater financial issue for the next president early in his or her first term.