During a recent forum on perspectives for the second hanf of the year, central bank chief Agustín Carstens now fully devoted to promote his IMF candidacy-- said he anticipates the peso to remain strong against the dollar for the balance of the year, despite the fact that to some extent, a strong peso affects exports .
At first glance, the event could have been regarded as a chance for three top officials to offer a rosy outlook, but in fact their perspective was objective and well documented. They other two were Finance Secretary Ernesto Cordero, a presidential hopeful, and Labor Secretary Javier Lozano, who may be out of the running for next years race.
The Banco de México governor made it clear that Mexico will not impose any type of barriers on foreign capitals, such as investment taxes or other limitations, since on the whole, the foreign investment flows are more beneficial to short and medium-term development and job creation than other options.
Carstens said the key to avoiding the mayhem that usually occurs when major capital outflows happen, is to make sure that Mexicos macroeconomic fundamentals remain sound. In this respect, Mexicos debt load, inflation rate and fiscal deficit ratio are all in good shape, and so are international reserves, currently at over US$128 billion, plus an open-credit IMF line of US$70 billion.
Thus, on paper, Mexicos outlook is indeed favorable, while U.S. fundamentals remain weak and over in Europe, the most accurate foreign-exchange strategists say the euros worst annual performance since 2005 will extend into next year as the regions sovereign-debt crisis saps economic growth.
Standard Chartered, the top overall forecaster in the seven quarters ended in March based on data compiled by Bloomberg, predicted the euro may weaken to less than $1.20 by the end of the year, from about $1.43 today. Westpac Banking, the second most accurate, is bearish in the short term, and No. 3 Wells Fargo cut its outlook at the end of last week.
The 16-nation currencys steady gain against the dollar since late last year may soon begin to reverse the trend, amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures and stepped up government-debt purchases as acute market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bonds since the euro started in 1999.
Were going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering, said Callum Henderson, Standard Chartereds global head of foreign-exchange research in Singapore. The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they dont have their own currency and they cant cut interest rates. The only way they can get out of this is to have significant recessions.
Irelands budget deficit will rise to more than 32 percent of gross domestic product this year, including the cost of bailing out the nations banks, recent European Commission data showed. Spains deficit will be 9.3 percent in 2011. Portugals total debt will reach almost 83 percent of GDP this year from about 76 percent in 2010, according to the commission.
Just a month ago the euro reached the strongest level since January, as traders sold the dollar on speculation the Federal Reserve would debase the greenback by printing more cash to purchase US$600 billion of Treasuries in what we now know as quantitative easing.
Those concerns are being overshadowed by the possibility that Europes economy slows further this year as governments impose austerity measures to reduce budget deficits, while officials drive bond investors away with talk of forcing them to take losses as part of future bailouts. One of the favorite destinations of those investments is Mexico.
We have a lot of time to go before the situation in Europe is resolved, John Taylor chairman of FX Concepts LLC, the worlds biggest currency hedge fund, said at the recent Hedge Funds New York Conference hosted by Bloomberg Link. That means the market is going to be twitching.
Taylor predicted some nations may leave the common currency. Stronger members have to say enough, you guys, get out of the euro, he said. The risk that Spain and Italy will get into trouble is going to cause the euro to get quite weak.
Meanwhile, back at the Mexico City outlook forum, Cordero mentioned that the government has shown a great deal of flexibility by doubling to US$14,000 the monthly amount that services firms can exchange at border cities and resort destinations. The former limit of US$7,000 was said by private organizations to be hurting business, as it was too constrained. The measure is part of the authorities anti-laundering efforts.
Labor secretary Lozano said the time is ripe for a comprehensive labor reform, but acknowledged that the confrontational climate dominating Congress in the current context makes it difficult to reach any kind of consensus on modernizing the labor code.