The Mexican peso has fallen from an average value of 16.4 MXP/USD to 18.29 as of Jan. 29, 2016, an unexpected and unwelcome drop for most multinationals. When FSG last surveyed Mexico executives in late October, 72 percent of executives were utilizing an exchange rate below 18 MXP/USD in their 2016 budget. While FSG had projected an 18.7 MXP/USD for 2016, the mean projection by analysts surveyed by Banxico in mid-December projected an average exchange rate of 16.6 MXP/USD.

While both Banxico and the Mexican government are stating that the Mexican peso is now wildly undervalued, they have moved quickly to continue propping up the Mexican peso by extending the use of its daily dollar auction program, with up to US$400 million being leveraged to support the exchange rate. Despite this support, multinationals should not expect that the Mexican peso will regain its strength any time soon, and more depreciation through the next few months remains likely. Why this is so is due to the following factors:

• Persistent emerging market volatility: The Mexican peso, the most widely traded emerging markets currency, has suffered from growing concerns about Chinese growth that have led to growing risk aversion among traders. The “super dollar” effect is largely a flight to safety, with the Mexican peso only one of many emerging market currencies suffering as collateral damage. Additionally, US interest rate hikes are likely further accelerating capital flight from emerging markets.
• Decline in oil prices: The decline in oil prices, partially driven by the same concerns over Chinese growth, has also led to significant capital flight from Mexican financial markets. With the decline in oil prices leading to a fall in expected demand for pesos relative to dollars the Mexican peso has necessarily suffered. This has occurred despite the current hedge protecting Mexico’s public finances from a fall in oil prices, and the relative low-importance of oil production to the economy.

Multinationals should begin to communicate with corporate centers that despite relatively strong fundamentals for the Mexican economy, continued weakness for the Mexican peso remains likely. FSG clients should leverage the Currency Volatility Playbook for recommended actions to mitigate the effects of the Mexican peso’s volatility on business performance.

For our latest updates and insights, FSG clients can visit the client portal. Not a client? Follow us on Twitter and Linkedin, or contact us to learn more.