“Everyone got used to playing with free, easy money. Now it’s going to cost us.”
On July 1, the Financial Times wondered just how low the Mexican peso could go, likening the ill-fated currency to a limbo dance: “Every month, it gets just that little bit lower.”
In the 20 trading days since, the peso has experienced eight record daily lows, in itself a record, even for Mexico. Not since the peso-dollar floating exchange rate system was established, on December 21, 1994, at the height of Mexico’s Tequila Crisis, has the currency notched up so many new lows in one single month. And there are still three days left to go!
At 16.25 pesos to the dollar currently, the peso has lost roughly 20% of its value against the dollar within a year. In December last year, with the exchange rate dropping to 14 pesos to the dollar, the country’s Exchange Rate Commission launched a currency intervention program in a bid to prop up the peso, or at least stymie its slide.
Like so many central bank interventions these days, it failed: by March, it took 15 pesos to buy a dollar. The Commission upped the ante, announcing it would conduct daily auctions of $52 million, without setting a minimum price requirement. That was four months ago. Since then, the peso’s value has continued to slide against the dollar, and the pain is beginning to show.
As El Financiero reports, although inflation, at around 3% , remains at historically low levels, pressures are beginning to rise. Some imported goods, including medical appliances, plastics and petrochemicals have registered price increases of between 10% and 15% over the last couple of months. With external trade accounting for 63% of the national economy, the impact is unavoidable. Particularly hard hit are companies with heavy debt loads denominated in dollars.
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