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Market uncertainty Plunging oil prices, China’s slowing economy contribute to peso depreciation

As the U.S. dollar nears the $19 peso exchange rate, Mexicans wonder what has caused their currency to depreciate and their northern neighbor’s to gain strength.

“The peso is not losing value because of problems in the domestic market in Mexico,” said Eduardo Saucedo, a UTRGV lecturer in international trade and the political economy of Mexico. “In fact, the domestic market in Mexico has been working very well.”

In many oil-producing countries, world prices are beneath production costs due to an oversupply in the international market. Only about five to eight of the world’s top 20 producers are still producing oil cheaper than the world market price, said Terrance Martin, an assistant professor in the Economics and Finance department at UTRGV.

“We love what’s going on with oil because it’s cheaper for us to fill at the pump,” Martin said. “We are less concerned, but for investors and people that work in that industry … it’s not such a good thing.”

Mexico’s federal budget depends heavily on the revenue generated by the state-owned oil company, Pemex.

“Oil is about 50 percent of income from exports for Mexico, [and] it’s about 20 to 30 percent of the budget of the government,” said Alejandro Serrano, also an assistant professor in the Economics and Finance department.

The decrease in the price of oil has also been caused in great part by a reduction in the demand for commodities, or raw materials, used in manufacturing and production, Serrano said.

A decline in its economic output in the past year, along with the correction or readjusting of its markets, has led to a decline in China’s demand for commodities.

“China is closed,” Saucedo said.

“They’re not consuming as much as before, so demand … has decreased.”China’s annual gross domestic product growth is expected to be only about 6 percent, down from 8 to 9 percent in previous years, he said.

“The world is so intertwined, globalization is such a real thing,” Martin said. “What happens in China affects us here. … We’re not insulated.”

This has led to uncertainty and a lack of trust in the Chinese yuan from investors, who now seek stronger currencies, such as the dollar, to safeguard their investments.

Along with an increase in the U.S. Federal Reserve’s interest rate last December to a range between 0.25 and 0.5 percent, the devaluation of the yuan has increased the value of the dollar, which in turn has had a depreciative effect on the peso, despite Mexico’s adequate economic performance.

“The peso has been losing value because the dollar is increasing in value, not because the peso, per se, is losing its value,” Saucedo said.

Mexico has little control over the international supply and demand for oil and other commodities. However, the country has the ability to increase its output of manufactured goods and focus less on exporting commodities, which could reduce the effect the plunge in prices would have on the peso.

Banco de Mexico, the country’s central bank, could do two things to help the peso gain ground, Serrano said. It could increase the supply of dollars by continuing to auction its dollar reserves or it could increase the interest rate in order to increase the value of the peso.

 

While the U.S. can celebrate its good economic performance reflected on a strong dollar and Mexico can profit from an increase in exports due to a cheaper peso, those who live on the border between these two countries might end up feeling the adverse effects.

“In terms of retail, I don’t know how many [Mexican] people are going to do their shopping in the U.S. The dollar is more expensive right now,” Serrano said.

“You will see less shopping in the area.”Commuters and other people who cross the border often are being affected by the expensive dollar and cheap peso, including UTRGV student Juan de Dios Flores, a senior finance major who often crosses the border into Matamoros, Tamaulipas, Mexico.

“Since my income comes in dollars, whenever I cross the border and go spend it in pesos, it’s actually benefitting me,” Flores said. “Things are way cheaper for me.”

However, the effects are not all positive.

Lety Vazques, a cashier at the currency exchange center Casa de Cambio Anahuac, located at the corner of May Street and International Boulevard in Brownsville, has seen a decrease in the flow of shoppers in the downtown area.

“Since [the dollar] is up, our business has decreased a lot,” Vazques said. “People are refraining from exchanging money because it’s really high.”

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