Why is the Mexican peso strong and has remained that way?

The Mexican peso has emerged as one of the strongest currencies in Latin America. The increase in foreign investment, coupled with the implementation of an effective fiscal policy, has played a crucial role: the update of electronic invoicing and the new version 4.0 of CFDI have further contributed to a strong peso with resilience and solid standing in the market.

Why is the Mexican peso so strong?

The Mexican peso, along with other currencies from emerging economies like the Chinese yuan and the Indian rupee, has been part of a positive cycle, while the US dollar has shown signs of weakness against a basket of strong currencies. This year, the Mexican peso vs the dollar had an increase of nearly 11%, reaching levels unseen in years.

The appreciation of the Mexican peso can be attributed to various factors, with the increase in dollar inflows to Mexico being particularly noteworthy.

Firstly, the rise in foreign investment, exemplified by the Tesla Motors new plant in Nuevo León, has contributed to the influx of dollars into the country.
Additionally, the strong performance of Mexican products in the United States has ensured a constant inflow of dollars.

Record-breaking remittances, surpassing the 50 billion pesos mark in 2022, have also played a significant role in supporting the peso. This influx of remittances necessitates intermediaries to make extraordinary purchases of Mexican pesos, which are then directly injected into the local economy.

Furthermore, the notable interest rate differentials compared to the United States, along with a redistribution of money flows for bond investors, have reduced the preference for debt purchases in Asia. The ongoing market impact of the war in Ukraine has prompted investors to redirect their investments towards more promising markets, including Mexico.

Lastly, the liquidity of the Mexican peso provides investors with the flexibility to swiftly enter the market and acquire pesos, with the assurance of being able to liquidate their capital in the short term should new investment opportunities or potential risks arise within the Mexican economy.

Monetary Policy and Fiscal Stability

Undoubtedly, one of the factors influencing the peso’s upward stability is the monetary policy implemented by the Mexican Central Bank, which has been raising interest rates in an effort to contain inflation and perception. Additionally, the fiscal policy of the López Obrador government has been prudent, avoiding the risks of larger deficits in the medium and long term.

A significant difference in interest rates is one of the key conditions for maintaining the peso’s performance against the dollar. The six-percentage-point difference between Mexico’s interest rate (currently at 11.25%) and that of the United States (5.25%) attracts investors seeking higher returns in the Mexican market.

Simultaneously, efforts are underway to modernize the fiscal framework in order to streamline tax collection. As of January 1, 2022, the enhanced 4.0 version of the electronic invoicing system will be implemented, although its usage is not currently mandatory: recognizing the importance of predictability for entrepreneurs and taxpayers alike, the deadline for the obligatory adoption of CFDI 4.0 is now set for April 1st.

Foreign Investment: Tesla Motors New Plant

The increase in dollar inflows to Mexico is one of the key factors that explain the appreciation of the peso against the dollar. A significant contributor to this is the steady inflow of dollars resulting from the trade performance of Mexican products entering the United States, as well as the aforementioned record breaking remittances from the United States.

However, the main driver behind the peso’s upward trend is the surge in foreign investment in production and industry, with the most prominent example being Tesla Motors new plant in Nuevo León, announced last year by the American company.

According to Nuevo León authorities, this new plant would be the largest Tesla plant in the world, with an initial investment of 5 billion dollars. With Tesla, there are now eleven automakers that have established at least one plant in the country, including Kia Motors, Mazda, Nissan, Toyota, Volkswagen, Audi, BMW, Fiat Chrysler, Ford, General Motors, and Honda.

Will the Mexican peso remain strong?

Experts believe that López Obrador’s commitment to fiscal stability, along with tighter monetary policy, will keep the peso one of the most stable currencies in emerging markets. Therefore, the projections place the peso at an average below 20.5 dollars for 2023.

Companies should anticipate a strong Mexican currency in the short and medium term, especially compared to other Latin American currencies, which will help maintain the purchasing power of Mexican consumers. While there are many emerging currencies that may be attractive to investors in the foreign exchange market, the Mexican peso has a significant advantage.

Experts have ensured that the Mexican peso will continue to be the most liquid currency in Latin America. A liquid currency is one that can be easily bought and sold in foreign exchange markets, giving confidence to investors and traded in large volumes, which in turn enhance the overall economic performance of the country.

The economic landscape favors the Mexican peso vs the dollar: the influx of foreign capital with the new Tesla Motors plant and the trade performance of the Mexican products in the USA ensures the entry of dollars, while the interest rates and fiscal policy maintain a strong peso as a liquid value that attracts business and development.

Why is the Mexican peso so strong?

The appreciation of the Mexican peso can be attributed to various factors, with the increase in dollar inflows to Mexico being particularly noteworthy.

Firstly, the rise in foreign investment, exemplified by the Tesla Motors new plant in Nuevo León, has contributed to the influx of dollars into the country.
Additionally, the strong performance of Mexican products in the United States has ensured a constant inflow of dollars.