Let’s talk about super weight. news from mexico

game of power

The exchange rate of the Mexican peso against the dollar was devalued, leading to uncertainty and property losses. The main feature of the economic crises of the seventies, eighties and nineties was the sudden devaluation of the national currency. It left a deep impression on the national psyche.

When economic storms were on the horizon, people bought dollars to protect their assets. Of course, I’m talking about people who have the ability to save.

In 2018, a possible victory by López Obrador created uncertainty. The exchange rate came under pressure. When the current president took office, one dollar was worth $20.3 pesos.

However, the biggest risk factor for the national currency in recent years has been Trump. The peso has gradually weakened since he became the Republican nominee in 2016. The day he won the presidential election, the exchange rate reached 20.7 pesos per dollar.

This is logical. Trump was against the North American Free Trade Agreement and had promised that if he won, he would remove his country from the said trade mechanism. This threatened Mexico’s largest source of foreign currency: exports to its northern neighbor.

Fortunately, the Peña and López Obrador governments were able to negotiate a new treaty. However, along the way, there were tense moments with Trump on the verge of breaking off talks. In April 2020, the dollar was worth $24.8 pesos, which is its highest historical value for this reason.

Since then, the national currency has been appreciating significantly. Yesterday it was quoted at 16.6 pesos per dollar.

We are facing super weight.

AMLO has called this an achievement of his administration. And undoubtedly it appeals to those who still have the trauma of devaluation of the past. Strong weight gives confidence. Furthermore, the middle and upper classes can go shopping in the United States where their pesos allow them to purchase more products.

But, in economics, an imbalance on one side can be as bad as that on the other. In this matter of exchange rate, neither so much as to burn the saint nor so much as to illuminate him. Significant depreciation or appreciation of the national currency does not provide any benefit to the economy.

In this sense, I’m afraid super weight is not good news.

First, because Mexican exports have become too expensive. Let me give a real example. A businessman who exports clothes to the US told me a few months ago that if the dollar fell below 17.5 pesos he would stop making money. “If it gets there and keeps going down, I’ll have to raise my prices. And I don’t know if it can compete with Asian exports to the United States now.”

All Mexican exporters are like that: struggling to remain competitive with a super weight that makes their entire operation more expensive.

The reality is that, even with the super peso, Mexico is expensive. This can be confirmed by the prices of hotels and restaurants in the national region. If you convert it to dollars, they are the same or even more expensive than the US.

By the way, this affects another important source of foreign exchange: tourism. Americans and Canadians have to spend more of their dollars vacationing here. The time will come, if it has not yet come, when they will prefer to go to other, cheaper destinations.

One reason for the appreciation of the peso is the huge difference between interest rates in the US and Mexico. Since the peso is one of the most liquid currencies in the international market, an investor can borrow in yen at real rates of zero, and invest that money in pesos at much higher real rates. You can reduce your risk by purchasing currency hedges in both currencies and still make a profit despite the costs. Without doing anything, with pure financial operations, it generates money due to high Mexican interest rates.

The problem for Mexicans is that we have to pay these rates in terms of public debt. And in the case of the private sector, also because businessmen shift this financial cost onto their products. If Setas pays interest rates of 11%, any business should offer high returns to its investors, otherwise, it is better to put the money in the bank and let it grow without doing anything and without much risk.

Others who suffered losses from the Super Peso are millions of Mexicans who receive remittances from the US. Every day more dollars come in from our countrymen (and certainly from organized crime). But these currencies with a stronger peso offer lower yields. This affects internal consumption.

The level of the super peso reaching 16.5 per dollar is worrying. It is already burning the saint.

leo zuckerman

X: @leozuckermann