Monday, September 26, 2011

$500 on black

Do you like playing the ponies?  Favor a nice game of Three-card Monte?

Then, step right up to your local Mexican ATM.

Not because there is a chance you will lose all your money (though there is that possibility at any ATM).  If you are exchanging American dollars for Mexican pesos, you will always be a winner.  At least, this past week.

Currencies fluctuate.  I will not pretend to know all the reasons why.  Even though I know a few.  But it is not important to know any of them for this post.

In recent years, if you went into the bank to buy pesos with dollars, you could have received as few as 10 or as many as 15.  That is a 50% difference.  (Well, going up it is.  Going down, it is a 33% decrease.  But we do not need a lesson in arithmetic, thank you very much.)

And it can happen quickly.  During this past week the peso slipped by 7% against the dollar.  But that is headline stuff.  Here is what it means practically.

When I first came down to Melaque, I could buy 6000 pesos and stay within my $500(US) limit.  Sometime around the beginning of this year, I noticed I could only get about 5900 pesos.  Then 5700 pesos.  Until in mid-summer, I could get no more than 5600.

Then it happened.  On the 20th of this month, the exchange rate moved far enough in favor the dollar that I could get 6000 pesos for about $458 (US).  And on the 24th for $435.

It is almost enough to make me want to empty my dollar accounts to buy enough pesos for the rest of the year.  Almost. 

But the currency exchange rate is just like the stock market.  The peso may continue to fall. 

Now, that is not good for Mexico.  Market analysts have predicted that Mexico will fail to meet its 4% growth rate for this year.  If that happens, Mexico may need loans denominated in dollars.  That will put inflationary pressures on the peso.

I have been asked several times how much it costs to live in Mexico.  We will skip over the rest of my usually-sage advice to get to the one point I never fail to mention.  People who retire to Mexico usually have a fixed stream of revenue.  That is the nature of retirement.  Any budget has to take into account the historical swings in the exchange rate.

And I usually provide a chart like this.  Those peaks and valleys make budgeting difficult.

If most people are like me, we tend to simply spend more when the exchange rate is favorable and then start cutting back on tortillas when inflation and the exchange rate take a dive in the opposite direction.

My bottom line?

This is all very interesting, but I am going to be out there doing my part to keep the Mexican economy chugging along.  Because even if Mexico has to be satisfied with a growth rate of 5% this year, it will probably be 3% higher than the rate north across the border.

And that is probably a very good bet.


Krispykey said...

A fun and interesting post (as are all of yours).  The cheaper peso should, all things being equal, boost Mexican exports to the U.S. and dampen Mexican imports.  (Are all things equal in life?)  Keep on bloggin!

Felipe Zapata said...

When I moved to Mexico almost 12 years ago, the rate was right at 10-1. At one point, it slipped down to almost 9-1, not good. Well, for me anyway. The advantage of 10-1 is that it's simple to make comparisons.  A few years back it soared to 15-1. Now those were the happy days. It's been dawdling along in the range of 11.5-1 for quite a while till, as you note, just recently. I hope it holds out at least for the rest of this week till my next pension payments arrive.

I've been doing quite a jig lately. Alas, it's bad for Mexico, so there is that. Ni modo.

blog said...

The peso is recovering a little bit in the last few days - it peaked at 14 to 1 for a day. I always look at the U.S. cost for 6000 pesos (the convenient high number at the ATM's (ours anyway). I think I may have caught it at the 450 or so point. The ATM's I use take .2 peso to the dollar of the exchange - in other words if they exchange rate is 14 to 1 they pay 13.8 to 1.

That said - yes spending happens when the exchange is favorable - and it probably more in the head than the wallet.

Steve Cotton said...

Good point. In that sense, it could be a gain for Mexico. But, these fluctuations always have enough variables to satisfy both the dark cloud and silver lining crowds. For me, it is a temporary boon.

Steve Cotton said...

When I lived in Laredo, under the old peso, the exchange was 8 pesos for 1 dollar -- making a peso worth about 12 cents. It is odd how we remember those calculations from 40 years ago.

Steve Cotton said...

I think the "spend when things are good" syndrome is merely part of the human condition. We feel secure, so why not spend.

Kim G said...

I've actually been thinking about how to manage exchange rate risk as an expat retiree, and even thought of working up an article.

But here are a few things to keep in mind.

1) The peso tends to move in correlation with the U.S. economy, so if the U.S. economy is expected to be strong, the peso will strengthen, and vice-versa. Why? The USA buys 80% of Mexico's exports. So the weak peso (along with low treasury yields and a low domestic stock market) are all saying the same thing: economic weakness ahead. You can also throw in a dash of risk aversion into the mix too. Most emerging market currencies have weakened dramatically against the USD in the past six weeks -- Brazil, Argentina, Korea, Colombia -- and on.

2)  As an expat living in Mexico, you have what's called a "natural hedge." This is a fancy way of saying that you have upcoming obligations in pesos. So if you buy a lot of pesos, but then the peso weakens further, you haven't lost in the same sense as a currency trader who needs to get back to dollars has. You just keep the pesos and pay your rent, buy your groceries, etc. Yes, you could have potentially gotten an even better exchange rate, but you still got a good one, and you can use the pesos.

3) A reasonable way to manage this risk and benefit from it is to start buying measured amounts of pesos as the exchange rate weakens.  You could buy a month or two's worth of expenses for every 4% drop or something like that. Assuming the peso weakness is temporary, this will help your overall exchange rate.  And unless the peso weakens forever (unlikely),  you will improve your overall cost of pesos.

4)  Interest rates in Mexico are higher than in the USA. While inflation is modestly higher, it's not hugely higher. This means that with your natural hedge, you can really clean up via a combination of buying pesos cheaper, then putting them into a Mexican bank and collecting some interest too.

Should you convert your life savings to pesos at once? Probably not. While the U.S. is a mess, and Mexico now has an independent central bank, I tend to think long term funds are still likely safer in the USA.  But when the Peso exchange rate gets to multiple standard deviations weaker than its normal trading band, you could seriously think about exchanging a couple years' worth of living expenses to take advantage of the rate.

Or, as Sr Felipe has done, buy something big like a car when the rate gets cheap. This latter point is particularly effective for big, sudden moves like what we've just seen as the retail prices of imported products will only adjust with a considerable lag.

I've personally been toying with the idea of buying a place in DF for some time now. With the exchange rate almost 20% weaker than the highs of the summer, that's a serious discount on real estate. If only I had a place lined up to buy.


Kim G
Boston, MA
Where we really envy the Canadian expats.

Steve Cotton said...

I think you just wrote that article.  And a good one it is.  If I was interested in buying a house (but I am not), now would be the time to do it.

Don Cuevas said...

Seems like a very good analysis, gracias, Kim.

Kim G said...

Hola Don Cuevas,

LOL... living large in Mexico.  You go for it !!!

Kim G
Boston, MA
Where to our dismay, the peso has started to strengthen again. Or the dollar to weaken. Whatever.

Steve Cotton said...

I am glad I bought a wad.

Merida Mikey said...

Here in Merida, whenever there is an appreciable incease in the exchange rate, prices in most of the larger retail stores reflect the increase (but never the decrease) almost negating the good deal we think we are getting.  Nonetheless, I've been visiting the ATM on a regular basis and stashing some of those pesos for a rainy day. 

Steve Cotton said...

I am always amazed at how people remember prices in stores.  I could not tell you how much I paid for onions yesterday.

Felipe Zapata said...

Steve, people remember prices when cash is tight for them. Flush people do not. You do  not remember, and neither do I. We are more fortunate than many.

Felipe Zapata said...

Kim:  I know enough about you to know there is no exchange rate "risk" for you. There is just the question of how rich you will be in Mexico.  A lot, or a little less of a lot.

Don't worry. Be happy.

Steve Cotton said...

Good point.  I did not intend to sound callous.  Of course, it may have more to do with my general memory.