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USDMXN Currency Pair

Among emerging market currency pairs with the U.S. dollar, the Mexican peso is one of the most important and heavily traded.

According to the Bank of International Settlements’ triennial survey, the USD/MXN pair represented 2.1% of all forex trading by daily volume in 2016.1)Retrieved 28 January 2017 http://www.bis.org/publ/rpfx16fx.pdf

That puts its trading volume slightly behind dollar trading against currencies like the Canadian dollar and the Chinese yuan (at around 4% each). But it’s also ahead of USD trading against other important emerging market currencies, such as the Singapore dollar, the New Zealand dollar, the South Korean won and the Hong Kong dollar.

There is no traditionally, widely accepted nickname for the USD/MXN pair. However, since late 2016, it has been associated with the nickname the “Trump Trade” because of volatility prompted by changes in US-Mexico trade policies proposed by U.S. President Donald Trump.2)Retrieved 28 January 2017 https://www.ft.com/content/83bfa33c-7dcc-11e6-8e50-8ec15fb462f4f

The U.S. and Mexico as neighbors have historically close ties as trade partners. The U.S. currently ranks as the largest single nation economy. Mexico ranks as the 12th-largest world economy.3)Retrieved 28 January 2017 https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html

Mexico is the U.S.’s second-largest export market and third-largest source of imports, and two-way trade in goods and services exceeded US$590 billion in 2014. Bilateral trade of goods between the U.S. and Mexico is intense and highly integrated. The top Mexican exports to the U.S. include electronic equipment, vehicles, oil, machines, engines and pumps, and medical and technical equipment. The top U.S. exports to Mexico include electronic equipment, machines, engines and pumps, vehicles and plastics.4)Retrieved 28 January 2017 http://photos.state.gov/libraries/mexico/310329/sept13/Bilateral-Trade-0913.pdf

The U.S. economy is considered among the world’s most diversified, with large-scale activity in the industrial, basic goods and financial sectors. While Mexico is an emerging market economy, it has a well-developed industrial sector. However, it’s also heavily dependent on oil production and exports. During much of the history of foreign exchange between the U.S. and Mexico, the latter’s currency was tied on a fixed rate basis to the dollar. That was altered gradually starting in 1976, when the country moved to a managed float of its currency against the dollar. At that time, the Mexican currency moved from 12.50 per dollar to 20.50 per dollar.5)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

The managed float was maintained until 1982 when, under pressure from growing economic instability, the Mexican government introduced a dual exchange rate system. The dual system maintained a “preferential” exchange rate applied to imports of essential goods and funds destined for payment of external public and private sector debt. It also maintained a “general” exchange rate applied to transactions not covered by the preferential rate. The preferential exchange rate was initially set at 50 pesos per dollar and later moved to 70 pesos per dollar. The general rate was determined by supply and demand for currency.6)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

By the end of 1982, the Mexican central bank was facing pressure on its foreign reserves and opted to modify the system once again, allowing for a hybrid controlled and free exchange rate system.

The controlled rate, which initially began at 95 pesos per dollar, was used for:

The floating free market rate was applied to all other transactions, including the purchase and sale of foreign currency. The controlled rate system remained in effect until 1985, when a managed float was reintroduced.7)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

Under this system, the central bank sought to obtain a currency supply-demand equilibrium in the in the controlled market and foreign currency settlements were made within a two-day period. During this period, the peso moved from a rate of 282 per dollar to 3,073 per dollar.8)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

In 1991, the bank moved to unify the free and controlled exchange rates by setting an exchange rate band that was allowed to widen on a daily basis by approximately 20 cents daily. At the same time, it established the “FIX” exchange rate system, which allowed parties in exchange transactions to use an official reference rate or agree to their own rates through a contract.9)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

In 1993, the country launched a new currency, the “New Peso,” which was equivalent to 1,000 units of the previous currency. In the following year, under pressure from international market turbulence and a speculative attack on the local currency, Mexico adopted a free float of its currency. The currency began trading at that time at 4.8875 to the dollar.10)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

Since then, Mexico has maintained the floating rate currency regime. And in that time, the peso has undergone gradual weakening against the dollar. The weakening trend was accelerated in late 2016, however, with the peso falling to below 20 per dollar under the influence of threats of U.S.-Mexico trade restrictions by the then-incoming administration of U.S. President Donald Trump.11)Retrieved 28 January 2017 http://www.banxico.org.mx/sistema-financiero/material-educativo/basico/%7BA363683E-9B8D-C3A9-610C-E2153395E4B8%7D.pdf

USDMXN Chart


Mexican Peso

U.S. Dollar

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