Money supply patterns in domestic contexts differ greatly from those at the international level. Trade relationships between countries bear huge impacts on the development of the international currency system. Developed countries write their contracts in the national currency of the exporter, while the trade contacts between a developed and a developing country are usually invoiced in the developed country’s currency (Boyes & Melvin, 2012). In this sense, the relationship between the US Dollar and Mexican peso deserves particular attention. An emerging market currency, the Mexican peso displays promising growth. Yet, its relationships with the US Dollar have never been even. The goal of this paper is to review the changes in the way the Mexican peso was positioned against the US Dollar between 2005 and 2010 and evaluate the strengths and perspectives of the currency in the international market.
Many emerging market currencies currently pursue unprecedented growth and competitiveness. Since the beginning of 2012, the Indian rupee, Brazilian real, and Mexican peso have been steadily outstripping the currencies of the world’s most developed nations, including the U.S. (Ross & Wagstyl, 2012). This increase in the currency value is a relevant response to the sharp falls at the beginning of the year (Ross & Wagstyl, 2012). Today, the Mexican peso is listed among the most promising but, still, emerging market currencies. Despite a 7-percent growth in value against the US Dollar, the Mexican peso lags behind the industrialized countries’ currencies. The most problematic was its position against the US Dollar in the first quarter of 2009, when the world was going through one of the most serious global economic crises.
The historical relations between the Mexican peso and the US Dollar had been quite even until, at the end of 2008, another global crisis hit the world. The global crisis that originated in the United States could not leave the Mexican currency market untouched. It took several months until, in March 2009 the Mexican peso reached its all-time-high point of 15.53 against the US Dollar (Trading Economics, 2012). That was the largest depreciation of the Mexican currency since 2005. Today, the average exchange rate is MXN 13.18 for $1. In other words, MXN 1 = $0.08. Mexico has been quite successful in stabilizing its economy. As a result, against the background of the national currency appreciation, Mexico is gradually turning into one of the most prospective international trade partners and investment targets.
For many years, Brazil has been regarded as the most prospective investment target in Latin America but, today, the rapid appreciation of the Mexican peso is turning Mexico into an investment lagoon. Mexico may soon overtake Brazil as Latin America’s largest economy, “though it still depends among others on continued growth in the US economy and crime situation in the country” (Mishra, 2012). At the same time, one of the greatest mysteries is why, despite the remarkable achievements at the macroeconomic level, the Mexican peso had been historically weak against the US Dollar. Wheatley (2012) offers two possible explanations. First, Mexico has failed to improve its productivity against its Asian competitors (Wheatley, 2012). Second, the huge amounts of oil dollars do not support the national and international currency markets (Wheatley, 2012). Since 1985, the Mexican peso had been continuously depreciating against the US Dollar, and the appreciation potentials of the recent macroeconomic achievements in Mexico are yet to be determined.
A few words should be told about the iShares MSCI Mexico Investable Market Index fund. The fund was organized in 1996 and currently consists of the stocks traded on the Mexican Stock Exchange (Mishra, 2012). The top sectors receiving investments from the fund include telecom, staples, and materials (Mishra, 2012). In the first quarter of 2012, the fund brought 16.29 percent returns to its investors (Egbunike, 2012). The strengthening Mexican peso (+8.8 percent against the US Dollar over the first quarter of 2012) has greatly contributed to the stability and growth of the ETF (Egbunike, 2012). Still, the current position of the Mexican currency is weak against the US Dollar, and this is one of the chief reasons why the currency is being considered as emerging.
The relationship between the Mexican peso and the US Dollar had never been easy. Today, despite certain macroeconomic achievements, the Mexican peso is still considered as an emerging market currency. In 2012, the Mexican peso managed to strengthen its position against the US Dollar, but it still lags behind the currencies of the most developed countries. The recent growth in the country’s currency and investment has been quite promising, but the future appreciation potentials of the Mexican peso are yet to be determined.