Of the dollar and other demons

Of the dollar and other demons

Leopoldo Mitre – August 31, 2015

With a weak local economy, the mexican peso will continue at the expense of the dollar; and as the "Harrier dog" in Garcia Marquez novel, can crash the local market and biting every cheerful prognosis in its way.


A dog pigweed, with a scarface in the forehead, broke into the byways of the market… extent tables of the merchants, disrupted gravers of indians and awnings of lottery, and step bitten four persons that crossed on the road.” Thus begins the magnificent novel “Of love and other demons” of Gabriel García Márquez.

And such as the Harrier dog, in the novel of the famous winner of the Literature’s Nobel Prize in 1982, the dollar has enter this year in the Mexican market: rolling economy, disrupting the plans of many companies, and in passing; biting the progressive image that Mexico has been already send on the international scene after the structural reforms undertaken during the first half of the term of the President Peña Nieto.

However, before pointing blame -and wield our anger against those who let the ‘Harrier dog’ in- need to understand the reasons why the dollar has appreciated strongly, not only compared with the Mexican peso, but with virtually all currencies of emerging economies.

Fed rates: the King is dead, long live the King!

You have to understand that today, more than ever, we live in a globalized world. The world’s economies are highly interrelated, not only for the improvement of logistics in the traditional commercial context, but thanks to information technologies that allow doing business between points so far -as Bankoh and Mexico city- in real time. This phenomenon under which the world seems to implode at the same time that makes us all part of a great Global Village (as named it a few years Noam Chomsky), has made the migration of speculative capital- which are played on stock markets from around the world- can be done in minutes. So money can move as they see fit, eroding in the way economies that depend on them for their growth or strengthening.

In this tenor the expectation that the Federal Reserve of United States (better known as Fed) announce an increase in their rates, for the first time in nine years, it’s getting stronger and will be sooner than later. In fact the minutes of its July meeting were unveiled a few weeks ago, and it can be inferred that the Fed thinks that US economy is already approaching the conditions needed to make the move. Even the majority of bets indicate that the Fed will raise its reference rate on September 17, kicking off a “real” monetary tightening that would end to a terrifying period of uncertainty financial and surely dissipate doubts that have not allowed to flow capital to emerging markets, including Mexico.

The imminent rise of interest rates in the U.S., which have remained close to 0%, has made those capitals which shifted in the past to emerging economies (with higher risk but a more attractive offer) today begin to return to the world’s largest economy. And it is that investments are evaluated not only for performance, but for the security that gives them the local market and in this last point the Americans offered all the possible guarantees.

Under this scenario the Mexican Central Bank has had to implement a mechanism for selling of dollars, as a temporary palliative to curb weight loss. However this is not more than a remedy that does not attack the root problem. The other variable missing move would be to carry out an adjustment upward on interest rates in Mexico, ahead of the Fed. But that is really complicated, taking into account the weakness of the domestic economy.

However it is important to emphasize that, although the possibility of a mass capital flight is difficult, the phase of turbulence will continue following the announcement of the Fed and to stabilize the flow of capital. And only with time, as well as the correct measures, we could start to think in an eventual recovery of the Mexican peso, which is now at historic lows against the dollar; as well as sovereign bonds with yields exceed today’s Americans in interest rate but not in a confidence index.

So the King of the sovereign debt and bonds market has return to claim the throne that emerging economies had ruled during his absence. And as in feudal times, the currency which is worth is the sovereign in turn.

The oil and the Chronicle of a death foretold

Oil prices have fallen down to sell this month to less than $40 a barrel. This marks its the lowest price since the global financial crisis of 2009. So countries dependent on exports of crude oil, such as Mexico, are strongly affected. A decline in revenues from the oil not only hit the Government’s coffers, but it affects confidence indices that are cornerstones in the fixing of exchange rates and macroeconomic figures.

Since the end of last year we saw as it began a major drop in the oil price, which has remained largely by increasing the supply in North America and Middle East, which has led stocks to a new record. Both the Arabs and the Americans have refused to lose market share, but in the way the price war carry many small producers to the brink of economic collapse. Finally, global players are changing positions that seeks to put an end to the dominance of Middle East and subtract power to Russia. But for those economy accustomed to high oil prices and whose spending or investment plans were based on a “safe” expectation of income from crude oil, now are forced to seek other income sources.

Unfortunately, Mexico has been a dependent from oil since long time ago, and today is involved in a battle of powers whose hits have sent the price of the barrel to floor without previsions of recovery in the short term. So it will not be more than endure the crossfire and tighten step for out take the productivity improvements that alleviate the decline in our oil revenues. Otherwise he will continue moving forward along a path that has no good end.

Under the local growth: a poor country is a poor country

In recent days was announced that Mexico’s GDP grew 0.5 percent in the second quarter of the year, a best figure than the last quarter but still does not show a clear recovery of the economy. On the other hand, institutions and rating agencies responsible for monitoring the economy have been trimming the expectations of growth until today in a modest 2.2%.

The slow implementation of structural reforms, the lack of reform in the judiciary that gives legal investment certainty, and businesses in the country, along with the little progress on issues of competitiveness have weighed on the confidence of investors into the country. In fact the latest scandals “conflict of interest” or those related to corruption and it diverted resources from public officials, hurt the confidence to do business in Mexico and merman investments as needed to maintain the parity of the weight.

By what while Mexico continue not having a strong local economic performance that supports the international fluctuations, exchange rate will remain at the expense of the Harrier ‘dog’ whom, like in the novel, enter the market biting any cheerful forecasts.