Why is the Mexican Super Peso the most liquid currency in Latin America, and what does that have to do with its strength against the dollar?

This year, the Mexican peso has risen sharply against the dollar, climbing almost 11% to a level not seen in seven years.

This rapid escalation is added to the cumulative gain that the “super peso” brings from last year, driven by the large influx of dollars into the country, which comes not only from the growth of exports, remittances and foreign investment, but also because of the high interest rates work as magnet for investors.

The peso is among a group of emerging market currencies that have gone through a good cycle, such as the Chinese yuan or the Indian rupee, while the dollar is showing signs of weakness compared to a basket of strong currencies.

While there are many new currencies that may be attractive to forex investors, the Mexican peso has one big advantage.

“It’s the most liquid currency in Latin America,” Gabriela Siller, director of economic analysis at Banco Base, told BBC Mundo.

A liquid currency is one that can be easily bought and sold on the foreign exchange marketsgives investors confidence and is traded in large volumes.

The most liquid currency in the world is the US dollar. It has the largest volume of buying and selling in international markets, which has allowed it to maintain its dominant position.

On the other hand, less liquid currencies are those that are less desirable, such as those that come from countries with high inflation, where paper costs less every day, and most people want to get rid of them.

In Latin America, Venezuelan bolivars or Argentine pesos can be mentioned.

So the fact that the Mexican peso is very liquid is a good sign. A liquid currency has more room for growth than one that trades little on the markets because it is undesirable.

In this context, the Mexican peso is currently the most liquid currency in Latin America as bought and sold more than other currencies in the regionThis is evidenced by the data of the Bank for International Settlements (BIS) – an international organization that unites the central banks of different countries.

The agency notes that the volume of transactions in the Mexican peso in the world has increased by 3% over the past three years and that this currency ranks 16th in the list of the most traded currencies on the planet.

This good position is due to several reasons. First, in Mexico, the currency is free to rise and fall (this regime is known as free float), and the monetary authorities have little to no intervention.

Secondly, the Mexican Peso can be traded 24 hours a day, while other currencies such as the Brazilian Real have time limits.

And the third has to do with trust. “It gives investors confidence the macroeconomic stability of the country and the reputation of the Banco de México which is independent of the government,” says Siller.

What is the reason for the growth of the peso against the dollar?

The super peso’s bull run against the dollar was due to many reasons. Here we will tell you about some of them:

1. Big dollars income to Mexico. This entry is mainly due to an increase in exports to the United States, although this is also due to a strong increase in foreign direct investment and an increase in remittances sent by Mexicans living in the US to their families across the border.
2. Big difference in interest rates. The difference between the interest rate in Mexico (currently 11.25%) and the US interest rate (5.25%) is six percentage points, which attracts investors to achieve greater profitability in the Mexican market.
3. Redistribution of cash flows after the start of the war in Ukraine. Those who invest in bonds, that is, buy debt, are less likely to buy debt in Asia.
4. And the attraction of the liquidity of the peso Mexican for investors. This liquidity allows them to quickly enter the market to buy pesos and gives them hope that they can exit quickly if they choose other options.

Will it continue to grow?

Some analysts argue that since interest rates in Mexico have reached very high levels, the Central Bank will most likely not continue to raise them.

This may encourage some investors to enter other markets in search of higher returns.

On the other hand, estimates point to a slowdown in the US economy in the coming months.

“The U.S. is headed for a recession”notes Carlos Alberto Gonzalez, director of economic analysis, exchange and stock market of the financial group Monex.

If growth in the world’s leading economy slows down, this contraction will directly affect Mexico and “could lead to some depreciation of the Mexican peso,” he adds, likely starting in the second half of this year.

“It won’t be a significant depreciation, but it won’t continue to rise any more,” he says.

Other experts, such as Siller, predict that if current conditions continue, “there is still room for the peso to rise,” but it all depends on how much the U.S. economic slowdown is.

If the slowdown is deeper than expected, less dollars could flow into Mexico. And as there are fewer dollars in the market, its price rises.

Bad economic news in the US tends to increase investor risk aversion and encourage them to seek shelter until the storm passes.

Thus, when the sky is overcast, big business prefers to withdraw from emerging markets and protect themselves in the hardest currencies.

Let’s see what happens.

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