The Mexican peso (MXN) has a storied history intertwined with Mexico's economy and global trade. Once a shining star among emerging market currencies, the price of the Mexican peso has experienced major volatility and crises over the decades. However, it remains an important currency for forex traders to watch.
This guide will cover everything you need to know about the Mexican peso.
History
- The peso was established in 1863, replacing the Spanish real following Mexico's independence. In its early days, the peso was on the silver standard, with its value linked to the price of silver. This led to a period of stability in the late 1800s when global silver prices were steady.
- However, the Mexican Revolution in the 1910s and moving off the silver standard in 1905 caused the first major devaluation of the peso. Inflation and devaluation continued in the mid-20th century, and in 1993 the peso crisis saw the currency lose over 50% of its value. This led Mexico to adopt a free-floating exchange rate, with the peso's value determined by supply and demand.
- In the 1990s and early 2000s, the peso rose and fell with Mexico's economic crises and reforms, like the 1994-95 Tequila Crisis and opening up trade with NAFTA.
- The 2008 global financial crisis caused another drop in the peso's value. Recently, factors like trade relations with the US, oil prices, inflation, and Mexico's economic growth have moved the peso's price.
While the peso is less volatile today than in past decades, its value continues to be impacted by Mexico's economy and role in global trade. For currency traders, the peso presents opportunities, but its history shows how vulnerable it could be to both domestic and external shocks.
Why is it important for traders to understand?
With Mexico being a major trading partner of the United States, the peso's value versus the dollar impacts both economies. For traders, movements in the peso present opportunities for gains - if you understand what drives the price.
The peso's value is influenced by factors like Mexico's economic growth, inflation rates, trade balances, remittances, and oil exports. The peso tends to weaken when Mexico's economy slows or oil prices decline. Meanwhile, interest rates and monetary policy set by Mexico's central bank impact the currency's value.
Speculation among forex traders could also cause swings in the peso's price, especially in the short term. Political and economic events in the United States also have ripple effects on the peso.
Traders ought to keep a close eye on Mexican and US economic indicators, the oil market, and global trends to anticipate moves in the peso. Understanding the drivers behind the currency's volatility allows traders to benefit by buying and selling the peso at opportune moments. With proper analysis, the ups and downs of the Mexican peso could present lucrative trading opportunities.
One way a trader could start trading currencies such as the peso is through CFDs. The benefits of CFDs is that they allow leveraged trading and short selling with tight spreads. Skilling, a reputable global broker for instance, offers USD/MXN currency CFDs. Meaning, a trader could go long USD/MXN if they expect the peso to weaken versus the dollar, and go short if vice versa, benefiting if the exchange rate moves in their favour. Click here to get started with CFDs today.
FAQs
- What drives the price of the Mexican peso?
The main drivers of the MXN exchange rate are relative interest rates, economic growth, inflation, and capital flows between Mexico and other countries. The peso tends to weaken when Mexico's central bank cuts rates. - What factors cause big moves in the MXN?
The peso is sensitive to changes in the US Federal Reserve's monetary policy. US economic data like jobs reports also impact MXN. Domestically, Mexican inflation and interest rate decisions move the currency. - Is the peso a risky currency to trade?
Yes, the MXN could experience big swings due to emerging market volatility. You may consider using stop losses and only trade MXN with risk capital. Also keep position sizes small relative to your account size.
Past performance does not guarantee or predict future performance. This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.
