USD-MXN Parity: Factors Behind the Appreciation of the Peso – Part I

The Mexican peso has shown notable strength against the US dollar, placing itself in a solid position with respect to some other currencies. On the last day of 2022, the exchange rate stood at 19.51 pesos per dollar. Today, at closing of this edition, its appreciation is 14.11 percent, reaching a value of 16.75 pesos per dollar, its highest level since 2015.

The Mexican peso has shown notable strength against the US dollar, placing itself in a strong position in respect to other foreign exchanges.

FACTORS INVOLVED IN THE APPRECIATION OF THE MEXICAN PESO

To find out the factors that have been contributing to the peso’s upward trend, the editorial team of Vallarta Real Estate Guide approached Eduardo Godoy, a professor and master of Economics, who shared some details to consider: “The Mexican peso closed in 2022 at 19.51 against the dollar, with a gain of 4.9 percent, or almost a peso, according to data from the Bank of Mexico (Banxico). At the beginning of 2023, it was among the three currencies that showed the greatest advances internationally.”

According to our expert, there are several factors behind the strengthening of the peso:

· Exports

“Exports are the main source of income in dollars for Mexico. Almost everything that is sold abroad is paid for in dollars. From January to November of 2022, Mexican merchandise exports totaled 528.9 billion dollars, which was 19.3 percent more than in the same period of the previous year.”

· Inflation and its Short-Term Reduction Expectations

“Inflation in the United States is below expectations and causes speculation about what decision the Federal Reserve (FED) is going to take regarding its monetary politics. Central banks are likely to continue this trend of increased interest rates.”

· Remittances

“Mexicans residing in the United States with family still in Mexico send dollars to their relatives and they are exchanged for pesos. Specifically, these dollars arrive in Mexico directly to the beneficiary, which means an influx of Mexican pesos that are injected directly into the local economy. Remittances have broken previous records since from January to November 2022, the total reflected 53.1 billion dollars, which represents 13.5 percent more than in the same period from the previous year.”

· Foreign Direct Investment (FDI)

“Foreign Direct Investment attracted 32 billion dollars in the third quarter of 2022 (that is, 29.5 percent more than the same period in 2021). There was participation by foreign investors in short-term Mexican government bonds, who were attracted by the differential interest rates on government debt instruments (Cetes). Therefore, if foreigners decide to buy Cetes it is because they have higher yields in Mexico than in other countries.”

· Interest Rates

“Interest rates derived from inflation (from February 2022 to date), forced all central banks to initiate the application of a series of restrictive monetary policies; for example, increased interest rates to reduce the amount of money in circulation. In Mexico, Banxico is fighting the high inflation by raising their interest rates to discourage consumption, reduce the demand for goods and therefore try to reduce prices.”

· Tourism Income

“Here in Mexico, most international visitors change their dollars to pesos. The entry of dollars by foreign tourists here in our country was 22.5 billion dollars in the first 10 months of 2022 (49 percent more than the same period in 2021).”

· International Oil Prices

“PEMEX charges its barrels in dollars but changes them to pesos to incorporate them into its local flow and pay its obligations in Mexico.” 

ADVANTAGES AND DISADVANTAGES OF THE STRENGTHENED PESO 

According to our expert, a key point of the Mexican economy is understanding how the dollar affects the peso. “Both currencies have a close relationship, especially because of the fact that a large part of Mexican imports come from the United States and the currency of that country is one of the main regulators in the international market. It is true, although many times there is excitement about the appreciation of the peso, but this requires caution.”

Godoy shares a series of advantages and disadvantages that he observes in the current value that the Mexican peso owns:

· Advantages

– It can help to lower inflation since it causes a depreciation of imports.
– Increases the return on investments in pesos when converted to dollars, which can lead to higher portfolio investment flows.
– There is less amount in pesos per dollar of debt, which may favor the companies that have debts in foreign currencies and income in Mexican pesos.
– It is also positive for the Federal Government because the interest paid on foreign debts are lower when converted to pesos.

· Disadvantages

– Exports become more expensive for foreign buyers.
– It can deter foreign direct investment, since more dollars are required for the acquisition of fixed capital in the country.
– The amount of remittances received can be reduced by converting them to Mexican pesos.
– Increase in interest rates on bank loans.
– Without any direct and/or positive impact on the finances of Mexican families, the high inflation continues.

REAL ESTATE IN VALLARTA · NAYARIT

When asked about the benefits of investing in the Vallarta · Nayarit real estate industry with the current appreciation of the peso against the dollar, Godoy responded that this situation could have several benefits for buyers of properties in the area. Among them, the following stand out:

· More Attractive Purchase Price

“Although traditionally the real estate market in the Vallarta · Nayarit area has been advertised in dollars, with a stronger Mexican currency and with more developments marketed in pesos, national buyers now have the opportunity to acquire a property with scheduled payments and avoid currency fluctuations.”

· Greater Confidence in the Local Real Estate Market

“The strengthening of the Mexican peso generates greater confidence in the real estate market in Puerto Vallarta. Foreign buyers may perceive that their investments are backed by a stronger currency, which can positively influence the decision to acquire real estate in the region.”

· Potential for Greater Goodwill 

“If the appreciation trend of the Mexican peso continues, buyers of goods and real estate could benefit from a higher appreciation of their properties. When they decide to sell in the future, the profit obtained by converting the Mexican pesos to US dollars would be higher than if they had bought when the exchange rate was less favorable.

In the second part of this special article, we will delve into how the appreciation of the peso benefits the real estate industry of Vallarta · Nayarit.