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 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.
'Skewed to the downside'
To be sure, Mexico has acted quickly and swiftly to prop up its currency. In February, Banco de Mexico announced that it had sold dollars outside of its usual auction process, and followed up with an unexpected 50 basis point hike in interest rates. In addition, the country's foreign exchange commission announced that it was discontinuing the regular auction program, whilst maintaining the possibility of further "discretionary" dollar sales.
Intervention "worked in the sense that it reduced the incentives to use the Mexican peso as a proxy hedge … by adding two-way risk," said Suarez. Afterward, "the peso's moves were more consistent with its own fundamentals."
Still, other analysts say the peso has become a canary in the coal mine for faltering growth. Economists have scaled back expectations for 2016 growth, currently expected to check in below 3 percent — short of President Enrique Pena Nieto's goal of 5 percent promised when he took office in 2012. Nomura Securities U.S. Economics team reduced its 2016 and 2017 growth outlooks for Mexico in January of this year.
Meanwhile, tepid growth in the U.S. and Canada appear set to put more headwinds on the Mexican economy.
"Low oil prices, fiscal austerity and softening U.S. demand for Mexican manufactured goods are offsetting the boost to Mexican competitiveness from the weaker peso, William Adams, senior international economist at PNC Financial Services Group said. Currently, the bank sees Mexico's growth this year falling in a range of 2 to 2.5 percent.
"Risks to our forecast for … Mexican real GDP in 2016 are skewed to the downside," Adams added.