- US Dollar to MX Peso exchange rates are likely headed sideways over the near term, and significantly higher over the medium term (likely timed with a stock market correction).
- US Interbank rates have increased relative to MX Interbank rates since 2014, but the trend is reversing.
- A clear pennant formation in the USD:MXN exchange rate from 2017–2019 may indicate historically higher exchange rates soon.
You’ve probably noticed a steep decline in the number of MX Pesos you receive for one US Dollar. The US Dollar has strengthened almost 6% against the MX Peso since early September 2019, sending exchange rates from above 20:1 to new lows testing 19:1 in October 2019.
Let’s take a longer view of the US Dollar to MX Peso exchange rate.
Looking back to 1996, we see that the MX Peso has historically lost value relative to the US Dollar, and that “pennant formations” appear in the charts before the exchange rate shoots higher.
Looking forward, let’s look at some other data and see if we can piece together what is happening, shall we?
This chart shows the interbank rates of Mexico and the United States from 1996 to present. These rates are derived from rates set by Mexico and US Central Banks. Central banks increase interest rates when economies are overheating. They cut interest rates when they are worried about a recession.
Higher interest rates increase the purchasing power of a currency, because it is more expensive to borrow. Lower rates decrease the purchasing power of a currency, making it cheap to borrow, increasing the supply.
What does this mean and can we learn from this information?
The green line above is the Mexican Interbank Rate divided by the US Interbank Rate, or the “Interbank Rate Ratio”. If the Mexico interest rate was 10%, and the US interest rate was 2%, the green line would show “5”.
When the green line goes up, the US Interbank Rate is lower relative to the Mexican Interbank Rate. When the green line goes down, the US Interbank Rate is higher relative to the Mexican Interbank Rate.
When the green line goes up, the US Dollar to MX Peso exchange rate is being forced down. When the green line goes down, the exchange rate is being forced up.
We can learn a lot by studying this chart:
- The green line shoots up whenever there is a recession because the US Dollar is the world reserve currency (US interest rates must be cut more aggressively than in Mexico to prevent drops in asset prices around the world).
- The USD:MXN exchange rate is negatively correlated to the Interbank Rate Ratio, and they move against each other over extended periods of time.
- After the dot-com collapse in 2000, the US lowered interest rates more than in Mexico in order to stimulate the economy. This caused the green line to go up, which stopped the USD:MXN exchange rate from going up too much.
- After the 2008 financial collapse in 2008, the US lowered interest rates more aggressively than Mexico, causing the green line to skyrocket. The USD:MXN exchange rate had already shot up, but was again held in check by relatively cheap money in the USA.
- Since 2014, the US raised interest rates more aggressively than in Mexico, causing the green line to drop. During that same period, the USD:MXN exchange rate shot up from 12:9932 in May of 2014 all the way to 21.3911 in January of 2017. The green line continued to drop, while USD:MXN rates stabilized and began to turn up again.
- The green line appears to be turning back up again, but remains at lower levels than in the recent past. The USD:MXN rate looks like it is in a period of consolidation, forming a pennant formation.
- Our best guess is that exchange rates will head sideways in the near term, but be prepared for a big jump in the USD:MXN exchange rate soon. This jump will be timed with a correction in global markets, hopefully not a nasty one.
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