Mexican Peso Case
Natalie McGuire
ACFI 703
Mexican Peso Case 1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why? According to Mexico’s BOP, they have a trade deficit as well as a negative current account balance. This indicates that the peso has devalued due to the significantly higher imports than exports, resulting in the depreciation of the Mexican peso against the US Dollar. 2. What does the private capital account suggest about the need for a devaluation of the peso?
Why?
The private capital account balance increases each year from 19721975. It suggests that there is more investing in the private sector of Mexico, which is financing more pesos, resulting in the capital account balance of 4 billion USD. The peso is being devalued due to the larger investment in the private sector. 3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why?
From 1972 to 1975 the private account balance more than tripled this is shown through the private transactions balance and suggests that the large devaluation was not imminent. 4. Take a look at Exhibit 5 in the case – Mexico’s international reserves. What has happened to
Mexico’s total foreign exchange reserves since 1970? How would you interpret this trend in terms of evaluating the strength or weakness of the peso in the foreign exchange market?
Would you conclude that the peso was likely to be substantially devalued from this data?
Why?
Mexico’s total foreign exchange has drastically increased from the year 1970 to 1975. In evaluating the strength or weakness of the peso, you would think that the peso would likely become more valuable due to Mexico’s
ACFI 703
Mexican Peso Case 1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why? According to Mexico’s BOP, they have a trade deficit as well as a negative current account balance. This indicates that the peso has devalued due to the significantly higher imports than exports, resulting in the depreciation of the Mexican peso against the US Dollar. 2. What does the private capital account suggest about the need for a devaluation of the peso?
Why?
The private capital account balance increases each year from 19721975. It suggests that there is more investing in the private sector of Mexico, which is financing more pesos, resulting in the capital account balance of 4 billion USD. The peso is being devalued due to the larger investment in the private sector. 3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why?
From 1972 to 1975 the private account balance more than tripled this is shown through the private transactions balance and suggests that the large devaluation was not imminent. 4. Take a look at Exhibit 5 in the case – Mexico’s international reserves. What has happened to
Mexico’s total foreign exchange reserves since 1970? How would you interpret this trend in terms of evaluating the strength or weakness of the peso in the foreign exchange market?
Would you conclude that the peso was likely to be substantially devalued from this data?
Why?
Mexico’s total foreign exchange has drastically increased from the year 1970 to 1975. In evaluating the strength or weakness of the peso, you would think that the peso would likely become more valuable due to Mexico’s