The Mexican peso has been under pressure over the past few years, and in the beginning of 2016 these losses accelerated with the currency falling to an all-time low relative to the U.S. dollar.
Economic woes tend to devalue a currency. Simplistically, a stronger economy results in a stronger currency. A currency's true value is in how it stacks up against other currencies, its exchange rate, and each country's currency's strength is dependent on its economy. The Mexican peso's record-low value versus the U.S. dollar suggests that the Mexican economy is performing poorly compared to the American economy.
Oil, Greece and China are a few factors that have contributed to the peso's descent.
Oil
Mexico is an oil producing and exporting nation. The slump in oil prices has impacted the country's economy and therefore the value of its currency. According to data from the U.S. Energy Information Administration (EIA), the oil sector generated 11% of the country's export earnings in 2014. Earnings from the oil industry (including taxes and direct payments from PEMEX) accounted for one-third of total government spending.
When Mexico makes available its full 2015 budget and spending results, it will likely show that revenues fell below expectations. This is because the country based its 2015 budget on oil averaging $79 per barrel throughout the year. Through the first three quarters of 2015, Maya crude oil averaged less than $50 a barrel. The country has reduced its 2016 growth forecasts and spending to deal with the fall in oil prices.
The strength of a country's economy and the value of its currency are positively correlated. When the economy is good, a country's currency appreciates. When a country's economy declines, so does the value of its currency. With oil a major factor in Mexico's economic health, the price of oil has a direct influence on the value of the Mexican peso.
Greece
The Greek debt crisis has negatively impacted the global economy for years. As the country teetered on economic ruin, bankruptcy and the possibility of being forced out of the eurozone, investors panicked.
Economic and political uncertainty lead to risk-averse investment decisions. Investors turn to the safety of traditional safe-haven investments such as bonds, the U.S. dollar and gold, while the assets that investors perceive as higher-risk see decreased demand. The Mexican peso is widely considered as a riskier asset.
While the Greek debt crisis has permeated the market for years, 2015 was a particularly tumultuous year. The country had multiple elections, a referendum, negotiations on obtaining a bailout, and then had to implement the strict capital controls mandated by its bailout. These uncertainties put riskier investments such as the peso under pressure. As of February, 2016 has been quiet in terms of economic drama from Greece, but the country is not out of the woods yet. There is still the possibility for further negative developments out of Greece that could pressure the peso.
China
Persistent concerns about China's economic growth have hurt the global economy, and Mexico has not been immune. As China is a top commodities consumer, the entire commodity complex has been impacted by China's economic slowdown. With Mexico being a commodity exporter, this has hurt its economy, and in turn the value of its currency.
To make matters worse, Mexico has been pushing increased trade relations with China to attract investment in many of its industries. China has become Mexico’s third-largest export market, just behind the nation's North American trading partners, the United States and Canada. With China's economy slowing, there are rising concerns that Mexico may no longer benefit from increased trade relations with the country, and this has pressured the peso.
