The Mexican peso (MXN) is one of the world's most traded currencies and is third in the Western Hemisphere, behind only the U.S. dollar (USD) and the Canadian dollar (CAD).

The Mexican peso has transformed from a national currency into a formidable international financial instrument in recent decades. While 澳洲幸运5官方开奖结果体彩网:forex trading in general has al🎀so🌄 boomed worldwide, three catalysts have helped drive the Mexican currency’s popularity and liquidity: t🅠he nation's relatively high interest rates, its proximity to the U.S., and its role as a major oil producer.

Mexican Peso and Global Economic Conditions

Developed nations tend to attract investment flows during times of uncertainty and global 澳洲幸运5官方开奖结果体彩网:recessions. However, emerging economies lik𒁃e Mexico tend to attract i♛nvestment capital during times of economic expansion and global stability.

As a result, currencies like the peso can experience wild fluctuations—called 澳洲幸运5官方开奖结果体彩网:volatility—in their 𒉰exchange rates during 🎐times of instability.

The Dollar As a Reserve Currency

The U.S. dollar is a 澳洲幸运5官方开奖结果体彩网:reserve currency, meaning it's held by central banks and used to facilitate many financial transactions, particularly in the 澳洲幸运5官方开奖结果体彩网:commodity market. Gold, silver, and 澳洲幸运5官方开奖结果体彩网:crude oil are usually priced in U.S. dollars.

That makes the U.S. dollar a 澳洲幸运5官方开奖结果体彩网:safe haven, which is essentially an investment strategy that limits an investor's exposure to loss🦩es during market downtꦜurns.

As a result, the dollar tends to apꦏpreciate, or rise in value versus other currencies, during recessions or when investors are risk-averse. For example, global investors might sell their peso-denominated investments and mutual funds for U.S. dollar-denominated investments and Treasuries.

That movement weakens the value of the peso against the doll𝓰ar.

The Mexican Peso and Recessions

We saw risk aversion play out during the 澳洲幸运5官方开奖结果体彩网:financial crisis of 2007-2008. On July 30, 2008, the peso traded at 10.0345 versus the dollar, meaning you would receive 10.0345 pesos for one dollar. Once the financial crisis struck, leading to the 澳洲幸运5官方开奖结果体彩网:Great Recession, the peso ജweakened by more than 53% to 15.4060 by March 2, 2009.

The Mexican peso also lost value versus the dollar due to the COVID-19 pandemic and the resulting recession in 2🤪020. The peso st🍒ood at 18.86 on Dec. 31, 2019, a few months before the pandemic began. Once the pandemic struck, many investors sent their money to safe-haven assets such as U.S. Treasuries.

As a result, U.S. Treasury bond prices soared and the Mexican peso weak🥀ened versus the dollar. The peso lost more than 33% of its value, to 25.13 pesos per dollar, by March 24, 2020.

1. Higher Interest Rates and the Carry Trade

Typically Mexico ༒has higher interest rates than the U🐎nited States. In other words, Mexican bonds pay a higher return than U.S. government-backed U.S. Treasuries.

Interest Rate Differential

Typically, Mexican bonds produce higher interest rate returns than the U.S. because its central bank maintains higher interest rates. Mexican government bonds were paying about 10% to 11% in interest in 2024, roughly twice the rate for Treasury bonds.

The difference in rates among developed and emerging markets leads speculators and investors to borrow money in low-interest countries and invest it in markets with higher interest rates—a strategy known as the 澳洲幸运5官方开奖结果体彩网:carry trade.

Carry Trade

The carry trade can be far more profitable due to the use of leverage by currency traders. Foreign exchange (forex) traders can use 10:1 or even 100:1 leverage to m🍌ultiply their gains from the carry trade. Shorting (or selling) the U.S. dolla✨r and going long (or buying) the Mexican peso with enough leverage can produce returns of 60% or even 600% in a year.

When i𝕴nterest rates are six percentage points higher in Mexico, such leveraged gains are possi🎃ble even when there is no movement in the exchange rate.

However, just as leverage can magnify gains, it can also magnify losses. The peso carry trade can collapse suddenly when the U.S. dollar rises rapidly against the Mexican peso, as happened during the 澳洲幸运5官方开奖结果体彩网:2020 bear market.

Before the 2020 recession, Mexican interest rates for government bonds offered 5-6% more interest than their U.S. counterparts, whi🅠ch encouraged borrowing funds from ཧU.S. banks and investing in Mexican bonds.

The trade can work well in times of 🐠stability since the USD/MXN exchange rate would likely be stable, but during the 2020 rec𓆉ession, instability rose due to the Coronavirus pandemic.

As a result, capital flows fled Mexico and into safe-haven investments, such as Treasuries, despite them offering much lower yields than Mexican government bonds. This led to the peso weakening by 33% from the end of 2019 to late March of 2020.

2. Proximity to the U.S.

Mexico and the United States share a border and a relationship that extends to broad trade agreements as well as immigration disputes.

Physical proximity has an additional effect on the peso’s value. Highly prosperous border regions engaging in commercial interactions significantly increase Mexican peso liquidit🐼y.

The USD/MXN forex pair offers a natural currency play, and it is also the most liquid MXN pair. Regarding trade, the United States exported more than $322 billion in goods to Mexico in 2024 while importing $475 billion worth of goods, adding significant liquidity.

However, trade agreements between the U🐭.S. and Mexico can be revised, which can lead to volatility in the USD/MXN exchange rate and capital flows betwee🦩n the two countries.

3. Crude Oil

Mexico is one of the largest petroleum producers globally and is the fourth-largest oil producer in the Americas after the United States, Canada, and Brazil. As of 2023, Mexico had about 5.6 billion barrels of crude oil reserves, placing it in the top 25 reserves holders in the world.

The Mexican peso often moves with energy prices because Mexico's oil reserves provide collateral for financing. The money from borrowing allows the Mexican government to obtain funds for domestic spending programs.

International lenders are more willing to invest and assume risk in petro🍸leum-dominated countries when crude oil prices are high. The connections between the Mexican peso and oil have also led to investors speculating on oil prices and the USD/MXN exchange rate.✤

However, many risks exist to investors due to volatility and uncertainty surrounding crude oil prices and Mexican oil production. A dramatic collapse in oil prices in early 2020 added to the depreciation in the value of the peso.

The Bottom Line

The Mexican peso shows high liquidity for three reasons. First, it offers relatively high interest rates that encourage the currency market's high-volume carry trade. Secondly, the country's physical proximity to the United States encourages 澳洲幸运5官方开奖结果🐭体彩网:billions of dollars in commercial activity between the two nations. Fina🅰lly, it has crude oil reserves that contribute to international trade.

That said, the Mexican peso's value tends to be volatile, strengthening in good economic times and weakening during recessions.