When is a historically weak foreign exchange rate not a major concern for the world at large? Apparently, when that country is Mexico.
Since the start of the year, the U.S.'s neighbor to the South has seen its peso sink to historical lows — prompting the hasty intervention of Mexico's policymakers to smooth out the volatility.
The currency's faltering fortunes have tracked other battered emerging market (EM) currencies hit by the global commodities downturn, yet the peso has still largely fared better than other EM currencies. The MSCI Mexico Index has outperformed the broader MSCI EM Index by 12 percent in local currency terms since October 2014, according to data from investment advisory firm DDCapital. That was at a time when the peso slumped nearly 30 percent against the dollar.
Economists say the peso has been adjusting to lower oil prices — which have recovered to near $40 per barrel but are still down nearly 40 percent year over year — and a stronger U.S. dollar. The Dollar Index, a broad measure of the greenback's value against a basket of trading partners, has retreated by about 4 percent this quarter, allowing Mexico's currency to claw back from the brink of a record low near 20 pesos per $1.
Yet unlike the consternation that normally accompanies a slumping currency, Mexico's trading partners have been silent.
As the peso's slide picked up speed earlier this year, the U.S.-Mexico's trade deficit widened to more than $4 billion, Census Bureau data shows, compared to nearly $3 billion in December 2015. That imbalance has helped feed a new sense of American trade protectionism, boosting populist candidates like GOP frontrunner Donald Trump.
However, analysts aren't convinced — at least for the time being — the peso's slide is creating a trade advantage that would be considered a salvo in the "currency wars" of which economies like Japan and China normally stand accused. For now, domestic price inflation appears contained as well.
"This isn't really courting trouble," said Eduardo Suarez, Mexico City-based co-head of Latin America strategy with ScotiaBank. Citing the charged rhetoric of the 2016 race for the White House, Suarez dismissed the idea that Mexico had an unfair advantage when compared to its NAFTA trading partner.
"Some populist politicians are arguing Mexico plays unfairly, but the argument is nonsensical," Suarez said. "Mexico has spent the past few years selling USD to support the peso and has never really participated in any currency wars," he said.