The exchange rate falters

In the current environment of the Mexican economy, there are at least four internal factors that work against the stability of the exchange rate …

With good political aim for little intellectual or operational merit, President López Obrador chose to hang the medal for exchange rate stability. The exchange rate, I remind readers, is the price of the dollar and the world’s currencies in Mexican pesos. But on this important front in the performance of the Mexican economy, dark clouds have begun to appear on the horizon. In that order, I refer to the main head in the edition of El Economista last Monday: “Peso futures accumulate more and more positions against in Chicago.”

The data is quite robust, since it is not mere forecasts by experts in the field, but future prices in a very deep market, such as the Stock Exchange of that American city (CME for its acronym in English) . In the corresponding journalistic note, these prices were attributed (sic.) “To inflationary pressures and the strengthening of the dollar as a reserve asset for investors …”. These causal factors being true, they are certainly not the only ones that threaten the external stability of our currency. Internal factors also count a lot.

In this sense, there are in the current environment of the Mexican economy at least four factors that visibly operate against the stability of the exchange rate. One of them obviously corresponds to the problem of local inflation. Hence, the Bank of Mexico will have nothing left in the short- and medium-term outlook other than to tend to a posture of anti-inflationary restriction. But other factors are also added to the above, such as insufficient quality appointments for high-level officials, very ill-advised government projects and, of course, the president’s very destabilizing rhetoric, especially in his morning hours.

There should be no doubt. The highly controversial electricity counter-reform project is already having a deterrent effect on foreign investment. In this sense, I respectfully remind the authorities that the exchange rate is sustained by the supply of dollars and by containing its demand. And the opposite effect is the one that occurs in the exchange market when, for example, President López Obrador attacks critical intellectuals whom he seems to hate a lot personally. It is called capital flight.

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Bruno Donatello


Economic Debate

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