Let’s Talk about the Mexican Super Peso

The primary risk factor for the Mexican peso over the past few years has been Trump.

Power Games

The exchange rate of the Mexican peso against the U.S. dollar previously declined, causing uncertainty and loss of wealth. The economic crises of the 1970s, 1980s and 1990s were characterized in particular by sudden devaluations of the national currency, leaving a deep mark on the national psyche.

When dark clouds are seen on the economic horizon, people buy dollars to protect their assets. I’m speaking, of course, of those who can save some money.

In 2018, the possibility that Andrés Manuel López Obrador would win the election caused uncertainty. The possibility put the exchange rate under pressure, and when López Obrador took office, $1 cost 20.3 pesos.

However, the major risk factor for our national currency in the past few years has been Donald Trump. The peso has steadily declined since he became the Republican presidential candidate in 2016. The exchange rate reached 20.7 pesos per dollar on the day he was elected.

It’s logical: Trump opposed NAFTA and promised that, if he won, he would pull the U.S. out of the trade agreement. This threatened Mexico’s primary source of foreign currency: exports to its northern neighbor.

Fortunately, the governments of Mexican Presidents Enrique Peña Nieto and López Obrador were able to negotiate a new treaty. However, there were moments of tension along the way as Trump was at the point of breaking off negotiations. Precisely because of this, in April 2020, the exchange rate rose to 24.8 pesos to the dollar, a historic high.

Since then, the Mexican peso has been significantly appreciating in value. On April 1, 2024, the exchange rate was 16.6 pesos per dollar. We are face to face with the super peso.

López Obrador has bragged about this accomplishment of his government. And it is clearly popular with those who have experienced the trauma of past devaluations. A strong peso inspires confidence. In addition, the middle and upper classes can go shopping in the U.S., where their pesos let them buy more.

But in economics, imbalances toward one side can be as bad as imbalances toward the other. With this exchange rate, it is not so much that it burns the saint, as the saying goes, nor so little that it doesn’t allow him to see. The economy doesn’t face significant decreases or increases in the value of the national currency.

In this sense, I fear that the super peso is not good news.

First, because Mexican exports have gotten not just more expensive, but a lot more expensive. I’ll give you a real example. A business owner who exports clothing to the U.S. told me a few months ago that if the dollar falls below 17.5 pesos, he doesn’t make money. “If it gets there and continues to fall, I will have to increase my prices. And I don’t know if I will be able to compete with the Asian exports to the U.S.”

This is the way it is for all Mexican exports: fighting to stay competitive, with a super peso that makes their whole operation more expensive.

The reality is that with the super peso, Mexico is expensive. You can see it in the prices of hotels and restaurants here. If you convert them into dollars, they are as expensive as, or even more expensive than, in the U.S.

Incidentally, this affects another important source of foreign exchange: tourism. U.S. and Canadian residents have to shell out more of their dollars to vacation here. There will come a time, if it hasn’t come already, when they will prefer to go to other, more economical, destinations.

One of the reasons for the appreciation of the peso is the huge differential between interest rates in the U.S. and Mexico. Because the peso is one of the most liquid currencies on the international market, an investor can borrow money in yen, at a real interest rate of zero, and invest that money in pesos at very high real interest rates. They can even minimize risk by buying foreign currency hedges in both currencies and still make money even at that price. Without doing anything, with pure financial operations, one makes money thanks to the high Mexican interest rates.

The problem is for Mexicans who have to pay these interest rates in the case of public debt, and, also, in the case of private debt, because business owners pass along the financial costs of their products. If the interest rate on Mexican Federal Treasury Certificates is 11%, all businesses must offer their investors a higher return; otherwise, it makes sense for them to put their money in the bank and let it grow without doing anything and with very little risk.

Others harmed by the super peso are the millions of Mexicans who receive remittances from the U.S. Every day more dollars come in from our citizens (and no doubt from organized crime). But that foreign exchange doesn’t yield as much. This affects domestic consumption.

As the exchange rate approaches 16.5 pesos to the dollar, the valuation of the super peso is cause for concern. The saint is already burning.