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WHY is the USD$ below 20;1


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Mon, November 23, 2020, 9:01 AM CST·

By Sruthi Shankar Nov 23 (Reuters) 

The Mexican peso strengthened below 20 per dollar on Monday for the first time since early March as further positive updates on COVID-19 vaccines boosted appetite for Latin American assets. The peso traded up 0.5% at 20.047 per dollar after firming to as much as 19.936 earlier in the session. Risky assets across the globe rallied on signs that U.S. health regulators could grant approval in mid-December for distribution of the COVID-19 vaccine produced by Pfizer and German partner BioNTech. Britain's AstraZeneca said its vaccine could be around 90% effective without any serious side effects, making it the latest drugmaker to report late-stage results. A more than 1% rise in oil prices also supported the Mexican peso - which has outperformed regional peers this year despite a 5.5% drop. "The immediate target is MXN19.80," Marc Chandler, chief market strategist at Bannockburn Global Forex told clients in a note. "The high nominal rates (~4.28% on a one-month bill, or cetes) and the broader gains among emerging market currencies appear to be fueling the peso's gains." The Brazilian real, the Colombian and the Chilean pesos edged up 0.2% each. Brazil's government has already signed a COVID-19 vaccine supply contract with AstraZeneca and on Sunday its health ministry said it would sign non-binding letters of intent to purchase vaccines from four other companies and Russia's wealth fund. Stocks in the region gained 0.5%, tracking a broad rally in global equities on hopes that an early rollout of a vaccine will revive the global economy. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 1221.78 1.04 MSCI LatAm 2174.54 0.55 Brazil Bovespa 107062.35 0.96 Mexico IPC - - Chile IPSA 4068.47 0.34 Argentina MerVal 51492.34 1.064 Colombia COLCAP 1242.02 0.18 Currencies Latest Daily % change Brazil real 5.3851 0.01 Mexico peso 20.0471 0.47 Chile peso 763.7 0.03 Colombia peso 3617.98 0.36 Peru sol 3.5947 0.00 Argentina peso (interbank) 80.3500 -0.09

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I think luvsdawgs and Ibarra are both right.

 

The US stock market is not making much sense.  Although, the new highs are certainly being driven by the good chance of Covid vaccines coming out in the next couple of months.

However, the US market also defies the logic that the current $27 Trillion in US debt is real and will have to go even higher with further fiscal spending to bring the US unemployment and small businesses back from depression like numbers from Covid.   This level of debt would normally lead to higher inflation and ultimate slowdown in the economy at some point.   But we have been saying for 12 years that the debt will cause inflation and a recession.  Yet, the US stock market defies logic, for sure, IMO ! 

Same thing can be said for the FED driving interest rates lower.  You would think at some point, that inflation would go higher and ultimately drive up interest rates, which could lead to an economic downturn.  But, when?    

So, who knows when the debt  will catch up to the US --during our generation or not?? 

Meanwhile, you look at MX and think about the old saying that economically, when the US sneezes that MX gets a cold.  That is one thing to consider.  You also need to consider that MX does not bail out its unemployed and poor the way the US does.  Then, there is the gigantic issue of PEMEX and the huge debt the MX Govt carries to keep PEMEX afloat.  One thing that will determine the fate of the MX peso more than the USD is the price of oil.   If oil prices keep going lower and lower, the MX economy could look weaker and ultimately make the MX peso weaker against the USD.  I think that could affect the MX peso more than inflation.   Quien sabe ?           

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I've seen some predictions of a 30 percent drop in the dollar that we made when the Peso was trading at 23.  That would suggest a Peso rate of around 16:1.  If the Peso continues to rise from 20 it will have a side benefit of putting a damper on inflation.

We've had a great run with IMO an overvalued dollar.  It is actually cheaper to live here, adjusted for inflation, than it was when we came 12 years ago.  Our planning is based on things going the other way for a while.

Open borders in the U.S. combined with near 50 percent poverty in Mexico will probably drive a resumption of people leaving the country.  That would be history repeating itself.  Remittances have been hitting highs every since the first of the year.

Covid is everyone's wild card at this point IMO.

We're pretty convinced at this point we are better off in Mexico for a lot of reasons.  We wish we could get citizenship but under the newer rules we just can't manage the test with our age related issues of hearing and learning.  But we are both Permanentes.

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There are two major factors interacting to affect the Mexican Peso. One is the dynamic between the coronavirus and the Mexican government's response. This drove the Peso down quickly, as Mexico was seen by currency traders and economists as not taking sufficient steps to combat the virus' spread and to mitigate the long-term effects on the economy. 

The second is the probable realignment of supply chains away from China. Many countries recognized they were far too vulnerable to supply chain disruptions as whole sectors of manufacturing (for example, medical supplies) came from one country--China. When the US looks to move supply chains, the obvious candidate is Mexico: existing relationships, cheap labor, close transport. So some economists suggest Mexico's economy is due to boom in the 3-5 year range as a result, putting some upward pressure on the Peso (wrt the dollar).

You'll continue to see variations in the 10-30% range for the next few years as speculators get hints at which of these factors is more important to Mexico's economic performance.

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1 hour ago, losgatos said:

When I moved to Chapala in 2004 the exchange was 4 to 1 and I thought I was getting a good deal. 

It was about 1 USD = 10 - 11 pesos in 2004. I sold one of our houses in Mexicali that year for USD and got just over $11.00 pesos.

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  • 2 weeks later...

Currency relationships are not always simple but if you use the $US as a base and compare to it, you can often make some sense of the current currency situation.  One of the most important overriding factors is fear, or lack of it.  If traders are nervous, even if the USA is the cause, there is a flight to the $US.  This is because the US Treasury bill is probably the most secure and readily available instrument worldwide.  You must buy $US to buy US Treasuries and, if there are more buyers than sellers, the value (in this example the $US) goes up.  The opposite is generally true.  When everyone is complacent, the opposite generally happens, and the $US goes down because people are willing to take additional risk in other investments, causing US Treasury bills to be less attractive.  The $US has been in a gradual decline for a number of months on the expectation and belief that a vaccine would soon be available and major economies would be back to work by mid 2021.  The world right now is feeling hopefull and believe that they see the light at the end of the tunnel (no train jokes please), so the $US deteriorates against most currencies (more sellers than buyers).  This is a GROSS oversimplification of currency movement, but helps to understand the base case for $US currency fluctuation.  All major govts have had to overspend because of the pandemic, so the US's big deficit is not really causing any fear right now (apples to apples between countries).  Canada and Mexico have very similar economic drivers (oil. mining, large trade with US and Canada is somewhat more efficient than Mexico (less waste and graft0, resulting in the $Cdn on average tracking slightly better than the $MXN peso over time, but both can be occasionally skewed relative to the $US because of the high % of their economies based on oil and mining.  In 2001, the $MXN peso was 9.33 to the $US and 6.03 to the $Cdn,  Compare that to today's rates of approx 20 and 15 to understand the long term depreciation of the peso against both and the relative lockstep of the $Cdn with the $US.  Bear in mind that there have been times during this period where particular events have caused anomalies (the super-peso and $Cdn above par when oil went over $100/barrel) but the 20 year trend is likely to continue over time.

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