Published On: Mon, Dec 1st, 2014

Mexico’s Peso Falls due to Oil Prices Drop

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Mexico’s peso fell on Friday November 28th to its weakest level against the U.S. dollar in more than two years as the continuing decline in world oil prices pressured commodity-dependent currencies.

As the most traded of the emerging-market currencies, the peso is often used by investors to hedge emerging market exposure and sold off in times of global financial turmoil. Already under pressure along with other emerging market currencies on prospects of higher U.S. interest rates, the Mexican currency lost further ground after the Organization of the Petroleum Exporting Countries decided against cutting crude oil output to address falling prices.

The Mexican currency weakened as far as 13.96 to the dollar during Friday’s session before settling back to 13.9080, its weakest close since mid-2012. The drop in oil prices, and the lack of liquidity because of the U.S. Thanksgiving holiday, were pressuring the exchange rate, local currency traders said.

The eighth most-traded currency in the world, according to the Bank for International Settlements, is down 5.9% from its 2013 close. Finance Minister Luis Videgaray said Friday that the peso’s decline against the dollar so far this year has been smaller than that of the Brazilian real or the Peruvian sol. The peso’s movements act as a natural shock-absorber against events such as a drop in the oil price, he added.

“When we had a fixed exchange rate, a couple of decades ago, these movements would cause an immediate outflow of capital, and particularly a loss of foreign reserves. That doesn’t happen today,” Mr. Videgaray said in a radio interview Friday. The minister said Mexico’s export crude price on Thursday was between $65 and $66 per barrel.

 

But lower oil prices affect Mexico’s fiscal accounts, since oil and related taxes account for around a third of federal government revenue. The government, which has budgeted for $79 a barrel in 2015, has hedged around 60% of next year’s planned crude exports at $76.40 a barrel, and has money in a stabilization fund to cover further shortfalls with which it should be able to avoid budget cuts.

Oil dollars don’t directly support the Mexican currency, as state oil company Petróleos Mexicanos changes its dollars at the central bank and not in the open exchange market. Over the longer term, however, oil helps the peso by bolstering the country’s foreign reserves, which are currently at record levels of around $193 billion.

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Local bank Banorte noted a recent increase in the correlation between the peso and oil prices from zero a month ago. The shift suggests oil prices could affect Mexico on two fronts: public finances and foreign direct investment resulting from the implementation of an ambitious overhaul in the energy sector to attract foreign capital, Banorte said in a report.

Foreign direct investment has slowed this year—just $15.3 billion in the first nine months—in part due to investors awaiting implementation of recent economic overhauls such as in energy, according to Bank of America Merrill Lynch. The recent flare-up in security issues, including protests following the disappearance and suspected murders of 43 teacher-college students after they were detained by police in late September in the southern state of Guerrero, is also likely weighing on investment and consumption, the bank said.

“We expect unrest could continue ahead of the [midterm] elections in 2015, though we do not expect escalation to a full-blown crisis. If this is the case, FDI should also increase ahead,” the bank said.

 

Source: http://online.wsj.com/

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