The Struggling Peso – Blame it on Pneumonia?

September 20, 2016 It has been three months since my last look at the tumbling peso and today we are rapidly approaching the greatest gap between the US dollar and the Mexican peso in decades. The current interbank rate is 19.76 pesos to the dollar.

Mexico is On Sale for Travelers and Retirees

First, let’s talk about the good news. For US travelers and retirees in Mexico, this is a boon. When exchanging dollars into pesos you are now over 19:1 and climbing. With Mexico’s inflation rate around 3%, those US dollars are going a lot further on food, rent, and services. Foreign (US made) products are much more expensive, rising with the exchange rate and commodity products like beef have risen right along with the dollar. But to a great extent, your stay in Mexico is still on sale at 20-40% off. Even our ‘expensive’ gasoline seems a bargain to US travelers.

Real estate, resort destinations and big tourist towns like Cabo are well savvy to the fluctuating value of the peso/dollar and tend to think in dollars when setting prices. So you might find your exchange rate savings mitigated in those purchases.

Making the Exchange is Making Money

Making your exchange from dollars to pesos is the key to maximizing your gain. Here are the best ways we have discovered to get your dollars turned into pesos.

Your bank card can be the best option IF your bank doesn’t have abusive exchange policies. Because I live in Mexico I researched several bank Visa cards to find one with a nominal international & transaction fees. Credit and debit transactions on cards usually offer an exchange rate at or near the Interbank exchange rate, plus a fee. That fee is something you should know before coming to Mexico. 

In 2015 new tax rules came into place and most stores and restaurants in tourist destination will have the ability to take your plastic payment. But tourist destinations also tend to be petty crime destinations. Check your billing online regularly to be sure your card is not being abused. With the new PIN electronic signatures I have found it more difficult to prove a change was not your own. Report discrepancies promptly. 

Mexican bank’s currency exchange has become more difficult. Some banks require you to have an account to change money. My bank no longer does cash advances for non-customers as well. Banorte usually posts the tightest spread each side of the Interbank exchange rate (about +0.4 for buy pesos and -0.4 for buy dollars).

Casa de Cambio (Exchange Houses) This all depends on local competition. Here in La Paz, there are few exchange houses and you will find their rates very close to that of the banks. But for non-account bearing travelers, there may be the only bet and the only game on Saturdays and Sundays. In a recent visit to Tijuana, Ensenada and the surrounding regions we found a widespread in the exchange rate offered, with the best rates closest to the border. I would not recommend the airport exchange houses, as they have you as a captive audience and I found both Los Cabos’ and Tijuana’s in-airport exchange rates insulting. 

Walmart. As much as I hate to give them a plug, their exchange rate on purchases is the best you will find and in an informal price survey we found their US made products also offered at a more competitive price than other markets.

Point of purchase exchange used to be the way to go, with local merchants craving US dollars. But today it is going to get you taken to the cleaners. I have seen Pemex offering 17.5:1 when the exchange was closer to 19:1. A local auto parts store was offering 17:1 the same day… close to highway robbery.

Just for amusement, I like to include traveler’s checks in this discussion and provide you one minute to stop laughing. Do they still sell them? They never were very widely accepted in Baja.

Looking at the Economic Reasons

The first edition of this article came in December of 2014 and it was easy to look back to June 1, 2014, as the day most world currencies began their fall against the US dollar. The ‘excuse’ then was the depressed price of oil, which bottomed out in February of 2015. In many ways, crude oil prices have become the new ‘gold standard’ for international trade. With oil devalued, oil producing countries faced budget imbalances that they were not prepared to endure. Russia and Brazil had drops in the value of the currency in excess of 60% and many Middle Eastern countries were put at the mercy of European banks to meet their financial obligations. Mexico, being an oil producing country, also took the hit and by February of 2015 the peso crested 19:1 against the dollar. But for a while things began to improve…

Then came Brexit. The last edition of this article blamed the second fall of the peso on the market instability caused by the British vote to leave the European Union. It had nothing to do with Mexico, but with investors rushing for the protection of dollar ownership it was the dollar that rose against the peso. 

The strength of the dollar against most other currencies has been the fundamental issue since June of 2014. With stock markets volatile, European investments in turmoil, the Middle East always a source of violence for the evening’s news, investors have turned to the ‘solid’ dollar as a place to put investment money into park. Despite the Federal Reserve solution of just printing more funny money, the dollar remains a better refuge than other investments. This ‘hiding out’ of money means it isn’t working; it isn’t working to build new factories or other capital investments for the future growth. 

But it is a bubble that has to burst. With the rise of the dollar, Mexico has enjoyed a surge in exports to the US. That’s right, those cheap strawberries you enjoyed in February helped agricultural products come in second only to automotive production and products in the first half of 2015. But it is all money flowing OUT of the US, as US domestically manufactured products are too expensive to be competitive in the world markets. Eventually, confidence in the dollar must fall, but it may only come at the expense of a world economic catastrophe.

Why Mexico is taking such a hit doesn’t really make sense, as Mexico will enjoy 4% GNP growth in 2016, nearly double that of the US. In a backhanded way, the fall of the peso has stimulated economic growth by lowering the cost of Mexican produced products in the world’s largest consumer nation, the United States. 

So there have been at least a half dozen reasons for the peso and other currencies to remain weak against the dollar as the world economic conditions remain fluid. But the reason the leading economists are giving for this most recent dip in the peso is the most amusing. 

The old economic adage is that when the US economy catches a cold the Mexican economy catches pneumonia. In this case, the pneumonia was caught by Hillary Clinton. That’s right, a Banamex economist put forth that the latest drop in the peso on Hillary’s health and the concern that it might give Donald Trump and edge. The markets are concerned that a Trump presidency would endanger trade agreements with Mexico and bring Mexico’s economic growth to a halt. Although you never say never in politics, it should be looked at as seriously as the boogie man under the bed. Besides, a president can ‘want’ all they want, making it happen will take a little more consensus. 

The peso will likely remain weak against the dollar through the middle of November. Regime change brings nervousness to the markets and we are now less than two months away from knowing the direction of the new US president and the next excuse they will provide us for the weakened peso.