The Struggling Peso – Under the Threat of Regime Change

Updated November 11, 2016 Here we are, just a couple weeks short of the second anniversary of my first edition of this article. This worldwide currency imbalance began in June of 2014, although the peso problems can trace all the way back to May of 2013. In the December 2014 edition of this article we bemoaned the drop of the peso from a long stable twelve point something to 14.56 to the dollar to today’s stunning peak interbank rate of 21.28 pesos per dollar.

The falling peso means some good things for the US traveler and retiree earning dollars and spending pesos. In many items Americans will find Mexico on Sale but it is all in how you  change your money that will make the difference. Click here for the article Mexico on Sale – Tips for changing your dollars to pesos

Why is the Peso falling?

In just one word, “Trump”. So is the recent and precipitous fall of the peso a Trump reality or an investor overreaction?

On Tuesday evening the markets closed currency trading with a reasonable expectation of waking to President-elect Clinton and the peso reached one of its highest points against the dollar at 18.28:1 since early September, when the Trump campaign appeared to go into self-destruct mode. 

On Wednesday the market awoke to the surprise of a Trump presidency with the fear that some of his anti-Mexican policies might actually come to pass and this would damage the trade relationship between the two nations. Since Wednesday a majority of world currencies have fallen against the dollar, as investors fearfully place investment cash on the sidelines in the relative safety of the US dollar. Since the 18.28 to 1 ratio on Tuesday night the peso has lost 10.8% against the dollar at its low today of 21.28.  

On November 15, 2016 the Bank of France made projections that the policies put forward by president-elect trump would result in more than a 40% reduction in Mexico’s economic growth in 2017, taking it down from 2.8% to 1.6%, this proection caused further instability in the peso.

Now to be fair, this doesn’t really reflect the reality of the situation and is more of a market knee-jerk reaction, much like what we saw with the Brexit effect on world markets. Markets always become skittish on regime change, and the volatility will eventually settle out. Presidents are just mouth-pieces and cheerleaders, but there is a lot more that will have to transpire before any of the president-elect’s perceived “anti-Mexico” campaign promises will come to pass. 

Getting Mexico to pay for The Wall isn’t going to happen.

A multi-billion dollar wall between the two important trading partners will likely be the first promise reduced to fantasy. It makes a nice campaign promise, but history teaches us the Berlin Wall failed to keep a hungry man from seeking a better life, the Mongols just went around the Great Wall of China and the perforations in the current Mexican/American separations would mean each section would also have to be defended. What are you going to do, plant landmines? 

Restricting banking between the two nations would likely have more effect on Americans living in Mexico than Mexicans sending money home from the US. Mexican banks have already indicated they would reciprocate any restrictions on Mexicans banking in the US with similar restrictions on Americans living and traveling in Mexico. That would be bad news for the several million US retirees in accessing social security payments or even their own cash north of the border.

If Trump vacates NAFTA

The free trade agreement NAFTA was initially a one-sided boon to Mexico, with companies like General Motors, Zenith and Nike moving production to Mexico, and yes, as Ross Perot said, there was a brief sucking sound of jobs moving to Mexico. But in the long run, NAFTA has been a good thing for both countries. Restrictions that benefitted the smaller economy of Mexico in NAFTA have now expired and the true benefit of the trade agreement north of the border is just coming into focus

A nullification of NAFTA would also affect Canadian trade. It would certainly mean higher food prices in the US and very likely the complete demise of the US auto industry, which now depends on Mexican manufacturing and assembly facilities.

The availability of decent-paying work and the growth of the Mexican economy has reduced the number of illegal Mexicans in the US by about 3 million over the last 7 years. Providing opportunity in native countries is the permanent solution to immigration issues. The bottom line isn’t a NAFTA result; it is the simple fact that transporting a product from where labor is cheaper to where customers will pay more for it is the new reality. Although Mexico is a convenient scapegoat, labor is cheaper in a majority of the world than it is in the US. There are just two real solutions, the American worker must be  more productive or accept earning less. History proves trade barriers don’t work.

Sending them packing

Mass deportations of illegal immigrants will hurt Mexico, should it come to pass. In 2010 Mexico initiated a “welcome home” program for returning citizens as a result of Obama administration’s tightening of immigration enforcement and the improving Mexican economy, so the infrastructure is already partially in place to handle returnees. But a flood of 2-4 million laborers returning to Mexico would be hard for an economy also hurt by any changes to NAFTA to absorb. 

But today about half the 11 million illegal immigrants in the US are not Mexican. Getting them all home to various countries should quickly prove more costly than providing them all a path to citizenship and to the tax rolls. Citizenship could even prove likely as the conservative objections to additional immigrant citizens was their tendency to vote liberal. Providing a path to citizenship now, after the election could be seen as a way to bring the hearts and minds of the immigrant to the conservative perspective. 

Mexico will benefit from a rise in the price of a barrel of crude.

There is hope in this new president from the Mexican economy’s perspective as well – the price of oil. Although the peso/dollar exchange has cast itself to the wind over the campaign results, the real driving force behind the fall of the peso has been the price of oil. Mexico is an oil producing nation who’s oil costs much more just to pull out of the ground than current market prices will support. Overproduction in the US and Saudi Arabia has hurt oil producing economies worldwide including Mexico and Brazil along with the intended offended parties, Russia and Iran. Should the new administration improve standings with Putin it would mean a restricting of US oil production, driving up the price of oil to sustain the Russian economy. With already stated desired changes to emissions and environmental restrictions, the demand for coal and oil is likely to rise. 

Boiling it down

The current flux in the currency market will likely calm next week and we’ll see a recovery of the peso against the dollar to a marginal extent. The volatility will likely continue until the new president actually starts to do things in early February. 

What it means to you

The Good Stuff: Mexico is on sale for US retirees and travelers, it’s that simple. How much of a discount you get is mitigated by the fact that the two economies are so interlinked. Toilet paper is toilet paper anywhere you go. How and where you change your money will remain the key to maximizing your dollar/peso gains.

Most real estate and major hotel chains, for example, calculate their prices in dollars, so you won’t see much of a change there. But many things will be very affordable to US travelers and those earning in dollars and spending in pesos. In the US look for great prices on winter produce. 

The Bad Stuff: As the US’s third largest trade partner a slowdown in the Mexican economy will eventually show up north of the border. The price of US made products in Mexico jumped 10% this week. 

The US made products have been rendered non-competitive worldwide by the currency imbalance and this will make it that much worse. The trade deficit has the hit record levels as the Fed continues to print money and investors continue to suck it up. A weakening of the Mexican economy is also a security threat to the US. 

So enjoy the Good Stuff now while it lasts. It is a great time to come enjoy Mexico on Sale.