The flight into US dollars! Dollar-denominated debts of Mexican companies weigh heavily.
By Nick Corbishley, for WOLF STREET:
As the coronavirus crisis roils the global economy, the strengthening dollar is causing all manner of stress and mayhem for national economies and their respective currencies. Nowhere is this clearer than in Mexico, whose currency, the peso, never really recovered from the last crisis and is now collapsing all over again. As of 4 p.m. Monday (Mexican time), it had tumbled over 3% to a record low of 25.42 pesos to the U.S. dollar.
Even by historic standards, the sell-off has been relentless. In the past 16 days, the peso has experienced 16 record daily lows. Not since the height of the last peso crisis, five years ago, has the currency notched up so many new lows in one single month. During that crisis, which lasted from late 2014 to late 2016, the peso lost roughly a third of its value against the greenback, none of which it was able to claw back. During this new crisis, which has so far spanned no more than a month, the peso has lost 26% of its value. The chart shows the value of 1 peso, which has plunged from $0.054 on Feb. 22 to $0.039 today:
The Mexico peso is among a number of emerging market currencies that have become popular vehicles for carry trades, offering juicy interest-rate spreads against currencies with much lower interest rates such as the Japanese Yen or the euro. But when broad market sentiment toward emerging market risks turns, as is happening right now amid all the mayhem being triggered by the global response to the coronavirus, these currencies are particularly prone to capital outflows.
Mexico also has another big disadvantage in moments like these: It has one of the most liquid currencies and one of the biggest bond markets among emerging economies. It is also traded around the clock and has a high correlation with other Emerging Market. And it’s used in instruments designed to hedge against EM weakness. And that weakness is coming back to the fore right now.
If other peso crises are any indication, it’s not just foreign exchange traders after a quick buck that are betting against the currency. So, too, probably, are Mexico’s biggest banks and institutional investors. During the last peso crisis, an estimated 75% of transactions of pesos into dollars were being executed by big institutions and banks, mainly Mexican.
Many large Mexican businesses are in the same group. As I wrote in a July 2015 article, “it is the worst of vicious circles: the stronger the dollar gets, the more the locals want it. The more the locals want it, the weaker the peso becomes. Rinse and repeat.”
Neither the peso’s last collapse nor this latest one are a reflection of the current state of Mexico’s economy; they are the result, primarily, of economic and financial forces taking place far beyond Mexico’s borders. That said, each time the currency weakens, it heaps further pressure on the economy. And that economy is already in the doldrums.
Last year the country registered its first annual decline in GDP since 2009. The secondary sector, which includes manufacturing, mining and construction, contracted by 1.8%, its weakest performance in over five years. Particularly hard hit are construction companies, which are having to grapple with a sharp falloff in activity, and automakers which saw new vehicle sales in the domestic market slump 7.5%. The services sector, following years of uninterrupted robust growth, was flat in 2019.
On the consumer side, just as last time, a weak peso may fuel rising consumer prices, including of food and food staples such as tortilla and beans.
A significantly weaker peso will make it more difficult for Mexican corporations with large amounts of foreign-denominated debt on their books to service that debt.
Many of these companies took advantage of the sharp rise in central bank-engendered liquidity in the wake of the last Global Financial Crisis to borrow from the international markets, in foreign currency that their own countries cannot inflate away. This they did in much larger amounts and for much longer periods than at any other time in history. The ongoing slide of the peso against the dollar — the currency has lost 58% of its value since 2009 — has significantly increased the amount of leverage, in terms of dollar-denominated debt, at these companies.
Some of those companies, such as Cemex and Bimbo, earn a large amount of their revenues in dollars and as such should have little trouble servicing their U.S.-denominated debt. But for many others, the peso, not the dollar, is the staple currency of their revenues. Some, such as the big-box retailer Liverpool, earn no dollars at all and will now face a Herculean task trying to service their U.S.-denominated debt now that the peso is so much weaker.
The task will now fall to the Bank of Mexico to try to counter these global forces that are dragging the peso down to historic lows on a daily basis. After months of cutting interest rates, it may have to start raising them again. As it did in the last peso crisis, it will probably burn through a fair chunk of its foreign reserves buying up pesos, but again to little avail. Like the central banks of most emerging economies, Banxico’s resources are extremely limited and no match for the myriad forces that are pushing so much of the world’s money into the world’s reserve currency. By Nick Corbishley, for WOLF STREET.
Bailouts, please! Read… Australia’s Construction Industry “On Brink of Collapse”: Started Going to Heck Last Year, Now Comes COVID-19
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Had Cifra in mid-nineties, wealth died with the NAFTA and the following devaluation. Hard learned lesson.
Between its failure to contain cov-19, the greed of its own corporatists, and the wars waged against it by the US for 180 years, Frida would have been furious. But she would have understood.
Say goodnight, Mexico.
Watched a video from Jeff Berwick last night He was saying that life in Mexico is great and walking around the grounds of a gorgeous Hacienda in the mountains there
Unfortunately, Mexico has a worse corruption problem than even the US government and banksters. I find it very amusing and also sad for the world that investors still view the US, with the “Fed” bankster cartel printing money to infinity and beyond to protect its cronies and the Republican senators using the coronavirus emergency to grab a slush fund of $500 billion to give to their cronies, as the world’s safe haven.
Failure to contain cov-19?! WTF are you talking about? One if not the only country that hasn’t close its border an has about 320 cases an mayby 2 deads , for been a 3rd world country not bad?
Because they haven’t done a fraction of the testing there that the US has done.
Aww so you need to tell me that MEXICO needs to test the dead for cov-19?, the results are 2. Mexico’s populations is double of Italy , Spain and France and maybe 1/2 of the US.✔️
No testing yet, really.
Just wait.
Before the CCP coronavirus, it was predicted that in the upcoming recession, at first the US dollar does very well; but, later on it crashes. Because of the CCP virus though, if the US were smart enough to find the right medicines to greatly reduce deaths and then end quarantine quickly “at least scale it down” “and just accept large scale infections, because, they could be treated”, and begin a massive effort to rebuild industry and shift production out of China. It’s possible to safeguard US dollars role as the one true global currency for the foreseeable future, as long it doesn’t continue ridiculous sanctions or try to continue to save stock market for too long.
How much of that will actually be done, is hard to say. At the very least, all “and I mean all” pharmaceuticals produced by American countries and generics consumed in America should be produced in America “as well as medical equipment and supplies”. And production of all high value goods should be shifted out of China.
“The CCP Virus”
Why do you do that? I understand you follow trump’s lead and think you can normalize stupidity by repeating it but you sound very childish and petty. The name of the virus is COVID-19, it’s a scientific name, a virus has no notion of state or ethnic origin. Nobody calls mad cow disease “The Overweight American disease” or the flue virus (another corona virus) the “the Western democratic-capitalist disease” You might say you are free to call it whatever you want…true…you are free just as i am free to fart in your face but i don’t do it because i am a gentleman, i have manners and respect bounderies. I am aware that this reply in no way will it have a wake up call on your politics nor is it my aim to challenge your ideas, but i sure hope you are good mannered and polite enough to keep this crap to yourself in a public forum. All the best to you from China CCP.
Chinese Communist Party initially lied about virus existence, the lied about human to human transmission, had samples destroyed, retaliated against those who tried to warn China “Wuhan 8” blame foreigners (Zhao & Cui). The Chinese people were the first victims of the CCP and now the world. The Chinese Communist Party owns this virus and we should not follow their propaganda or let these mass murderers get away with it
All state do that. China was highly forthcoming. And most of the .death are because of incompetent government action. To kill the virus it is necessary to a)test & b)lock down. In both the American government is lacking and that is to put it mild
In no way would I want to support or condone the actions of Xi or the CCP, but, if you’re truly concerned about lying, VG, you need to reflect for a moment on the volume and frequency of lies that come from the stable genius. If you’re playing a “moral card”, especially at the tables in Vegas, you should consider a house-cleaning of your heart and mind.
It is claimed from every new disease that it is an escape bio weapon. Covid-19 with its low mortality (5%), short sickness period and hitting particularly the elder is not a particular well designed bio weapon. And it wont even kill the leadership because for that there is, non-scalable, medicine
If we want to be consistent, the 1918 “Spanish Flu” was first recorded in Kansas, so we should be calling it the “American Flu” or “Kansas Flu”.
The term CCP Virus does not come from Trump, it comes from dissident Chinese who have far greater knowledge of their country’s communist party. They love their country but hate the authoritarian Party which controls it.
This dissident faction has a newspaper, the Epoch Times, which provides their perspective and news which is either unknown or counter to the interests/ideologies elsewhere. They endorse and appear to have originated the term CCP virus.
Weird sect paid for by the CIA dissident fraction.
They obviously love their country as seen by them working for a foreign countries secret service and hate the current rulers because they want to be in power.
Their espoused policy platform is also seen by the average Chinese as weird and worse than the current one in power.
Because It came for CHI-NAH
I fart in your general direction, one gentleman to another.
Wow! Spoken like a true PROG.
You sir, are a Canadian troll of the highest magnitude.
I cannot believe you are allowed to spew your vitriol day in and day out and no one bats an eye.
“The couple, both in their 60s and from Arizona, were hospitalized after ingesting chloroquine phosphate, an additive often used at aquariums to clean fish tanks
It’s believed that they confused the chemical with hydroxychloroquine, an antimalaria drug that’s shown promising results in treating coronavirus patients”
Source: DailyMail
Amen to the “out of China” part! Build it in México. If a label says “hecho en México”, I like that a zillion times better than the usual china china china all day long crapola. THEY are not our neighbors ‼️ And do not behave very neighborly either. China acts exactly the way Nazi Germany in the 1930’s did. I say move it ALL to Mexico, USA, India, Colombia….. friends!!
Just terible.
Mexico should just lock complete borders
And then change to digital currency
Dollar does not work for mexico.
Juan:
The dollar works very well for the average Mexican! Just not so well for the Mexican government!
Sorry, that is not true. Using dollars makes the average Mexican poorer and that is why it is bad for the Mexican government. For debt it is more a wash. You need to pay more in pesos for the principal but the interest is lower
It should work well Don’t most Mexican workers get paid in dollars anyway?
No. Common misconception by Americans.
Good info and background…with one caveat
“That said, each time the currency weakens, it heaps further pressure on the economy.”
Mexican exports (especially to absolutely key US mkt) will become much cheaper, so volumes will soar.
Gvt foreign exchange relationships are like watching two master forgers fight with knives.
Cas127:
Yes, with “engraving” knives!
The Fed only needs to print a wee bit less than all the other central bankers, to be the least dirty shirt!
When a country, or company, issues bonds not in its native currency, it always runs risk of default if thier native currency sinks to a level where the bonds cannot be serviced.
And it is a major predictor for the end of any country, to include America:
When US Treasurys are issued in something other than the US dollar.
“Mexican migrants sent home a record $36 billion U.S. in remittances for the year 2019.
Remittances replaced oil exports as Mexico’s largest source of foreign exchange.
From foreign tourism, Mexico receives about $25 billion while only $22.4 billion in annual petroleum exports.”
With the peso being so low, those U.S. remittances will be a godsend in 2020.
Maybe not a godsend in 2020. With CA and other states shutting down, how many Mexicans will be able to hold on to their jobs north of the border ?
No jobs means reduced remittances.
That’s money not spent, respent, spent, respent, at least 8x over through the Multiplier Effect, sales taxed each step along the way, to support the local communities where the Mexicans work.
No wonder they often live in “food deserts” and “poverty struck communities” dependent on welfare and food banks, the money they earn has left town to never return.
I believe the low for the stock market is in and people go back to work in about 3 weeks, not 3 to 4 months. Or should I be duped by Zerohedge articles again to believe the sky is falling and miss another stock market recovery again because of all their negativity?
Tomorrow I do some speculative buying of junior gold miners/explorers based in Canada. Doesn’t the strong U.S. dollar give me more purchasing power of foreign stocks given today’s $1.45 U.S. to Canadian exchange rate?
Lol, stocks will weave up and down for the rest of the year.
S:
In the last few weeks the Cdn dollar has fallen from 1.34 to 1.44 since it is often seen as an oil currency.
Hope you know your gold stocks!
Many Canadian miners are now shutting down for coronavirus. Is a second hit coming?
Many gold stocks like mid-tier AEM, which I own, have seen drops of 50% so far.
Others like OGC.to are at all time lows (best mine in Philippines shutdown by gov).
Good luck!
Wes,
That drop in currency value is a reason why any production left is still going on in Canada.
As an aside, my son is on days off from the Oil Sands. His company phoned him up and confirmed he was returning next week. I guess some workers are staying home. Instead of flying he will be driving back and plans to stay there until things are more stable. Mind you, he doesn’t stay in camp. Maintenance continues and slowdowns are a good time to rebuild and replace equipment.
S,
Missed the sarc tag.
I don’t care for charts that exaggerate differences by not including the whole y axis. That 27% difference looks like a 90% drop due to the way the chart is drawn. I see no value in that kind of distortion.
Zantetsu:
Like English, there are no laws of graphs!
So Nick is safe! He hasn’t broken any “graft” laws!
Besides the close ups scenes of the crime are much more entertaining!
We get to see the red ink better!
P.S. A joke. In the good olde days of the USSR, two friends were curious about all the glowing reports in the newspapers about Siberia.
Being a bit skeptical, they decided that only one should go. The friend going agreed to write back using red ink if it was all a lie!
The friend goes to Siberia and writes back in black ink how wonderful life is in Siberia and that his friend should join him!
Then at the bottom of the letter the friend says. P.S. There is no red ink in Siberia!
Zantetsu,
Get real. A 27% drop for a currency in one month is HUGE. And a HUGE PROBLEM. I should have drawn the axis all the way down into the comment section. There is no way to exaggerate the problem.
They defaulted in 1982. What’s the difference?
Recently read Paul Theroux latest about a trip thru Mexico. This guy really gets off the beaten track. I knew Mexico had poor people but not how poor. It rivals parts of Africa. In one of the photos he is standing next to a woman holding a woven tourist sombrero. She is taking it to the mill to trade it for grinding a small amount of corn, at most half a bushel. The cost of grinding is so close to zero it’s hard to calculate but say 5 to 10 cents. The whole village is like that, so poor that actual money is rarely seen.
Most people in the USA has never lived in a third world country.
They have no idea, just like Cramer shouted.
Iamafan:
“Most people in the USA has never lived in a third world country.”
They will be getting some experience in the coming decades, for sure.
The only people with money are the Spanish monied class that own the corporations and control the Govt. I haven’t been to Mexico for quite a few years, but stayed in local hotels in smaller towns. Anyway, one day the garbage truck came by with two kids in the back of a flatbed truck tamping down the bags to get more in. A guy was pushing a butchered steer in a wheelbarrow, in the hot noon sun, over to a restaurant we used. The buildings were going up inch by inch with hand mixed concrete. These people work incredibly hard for just about nothing. Either that, or they starve. Never went back. And isn’t Carlos Slim the richest man in the World? Something sure as hell is wrong.
Will the low peso make those dollars anymore of a godsend than a high peso? Prices will rise to accommodate the change, no? Regardless, they won’t be alone in their discomfort. GFC2 looms ahead.
I agree. We hear about large exchange rate fluctuations, yet I go to Mexico with my USD and a beer in a decent restaurant is still 4-Bux +/-
Are other countries actually doing more stimulus than the US? If so, how come we have not heard about it? If we are the cleanest dirty shirt (as this article seems to imply), that would be somewhat reassuring.
Prices for things like beer and restaurant food seem to rise with hard currencies Same thing here in Turkey It hurts the locals the most obviously
I live in Southern California. The company that I work for uses a company in Tijuana Mexico to manufacture our circuit boards. I was down there back in 2018. A couple of managers from the Tijuana facility were telling me that most items are cheaper in San Diego than in Tijuana. They told me that when they go shopping for things like Levi jeans they go to San Diego. I was completely surprised. They said that even though there is a lot of industry in Tijuana, they are not treated well by the country of Mexico.
Only a schmuck goes to a foreign country and pays for stuff using USD. Exchange those highly valued dollars for local paper and use your bargaining skills. You’ll save a bundle.
Ah yes, the good old gouging when paying for small ticket items in hard currency which can get downright savage. It makes the usual 1% currency charge of most credit cards a fair deal, good to hear it’s still alive and well. :-D
Regarding stimulus: it’s just starting to appear in the news here in Italy. A refreshing breath of fresh air after week after week of complete gloom and doom. Better, much better, deal with financial and fiscal shenanigans than with this kind of stuff.
What’s certain right now is about 70% of Italy’s businesses will need some form of financial assistance to avoid “long term damage”, a catchall definition comprising anything from having to future-endeavor people to downright disappearing. Manufacturing, which is extremely important in my area (now officially the worst affected in the country), and tourism will also need to take into account the situation in other countries.
What’s the government doing? So far not much, despite the EU having effectively given them the go ahead to ramp up spending to infinity and beyond. I don’t understand if they are just being cautious/superstitious (understandable) or are still panicking. Either way that’s bad leadership: we need a Golda Meir right now, not a Moshe Dayan.
Might it be the case that the current Italian government has a ghost haunting them named Salvini and that they’re avoiding anything Salvini might do ?
I wonder if the government was slow to act when the covirus was starting to spread simply because clamping down on flights from China and elsewhere would have been a Salvini-like thing to do ?
Just my speculations for what it is worth …
They can wait. Lock down will last for more than a week. They need a ready plan a few days before they lift the lock down for maximum voter effect and least public push back.
Beardog, there are two economies in Mexico: the Gringo Tourist Economy & the actual Indigenous Mexican Economy. Total bifurcation.
My guess is you were in a bar/restaurant in the former.
“poor Mexico, so far from God and so close to the United States”
Porfirio Diaz
I asked an epidemiologist about the corona virus impact on the US. He said, ‘they’ll be stacking the bodies up like cordwood in the street’. You are like tourists on a tsunami beach walking round looking at the sea bottom heedless of what is just about to happen. Take care everyone.
The Mexican peso plunging like that must be a nightmare for Spanish companies that are exposed to the Mexican economy.
They do find themselves in a nice mess.
The retirement plan that works. Store your gold bars in US bank vault and sell as needed in USD. Doesn’t matter what the fake paper fiat money is doing. The problem is that no one has saved anything for their retirement. The plan above is how I live now. In Mexico on the beach like a king with shorts and flip flops. Hard to believe, but true. Also, armed to the teeth, legally.
I wrote and approved this message.
/s/ retired US ex-pat
Mexico is in world of hurt. If any body is familiar with the big plans for Loretto,BC that was the hot deal from 2000+ you’ll understand. What a rip-off. Currently reading ZeroZeroZero. Great read and gives good insight into many of the problems that Mx faces.
Don’t worry, Mexico. We’re de-valuing the USD as fast as we can!
Thanks for the article, appreciated.
Haven’t those large Mexican companies with USD-denominated debt and pesos revenue, hedged for the possibility of a lower peso? Hence, the weak peso not being as bad as it seemed for them.
– This article is overlooking one thing. Not only traders but (US) Investors were also helping those mexican companies. It works along the following lines.
– Let’s assume that US interest rates are at 2% and mexican rates are at say 6%. When a mexican borrows money in MXN then it has to pay 6% but in USD it can pay only 2%. So, this mexican company offers USD denominated bonds to (US) investors at say 3%. This is beneficial for both sides. US investors receive a higher rate (3% instead of 2%) and the mexican company pays 3% instaed of 6%.
– This all works well as long as the MXN rises or stays flat against the USD. But once the USD starts to rise against the MXN then this company is in deep trouble. Not only faces this comany higher rates but also it faces much higher costs to repay the loan/bond.
– And this applies to ALL socalled EM countries.