Nearshoring to Mexico: Don't Be a Currency Casualty – 5 Expert Answers

End of the Story:? The US$-Peso foreign exchange rate is one of those stories that gets overlooked until it drops by 11.5% in the week following a presidential election.? International managers have to understand the fundamentals of macro-economic forces – but they also have to know a guy.? Today’s local expert is David McCormack of Monex USA ?– a forex consultant.?????

I started talking to David McCormack of Monex USA well before the recent election and the accompanying volatility.? ?NASP is always looking to profile local experts and solutions providers who can help nearshorers execute their plans.? Monex is one of the types of specialists that all international managers in Mexico need to understand.? Some specialties are always needed – lawyers, accountants, HR, and operations people are vital all over.? In Mexico, successful managers focus on customs people, logistics, sources, and finance relationships.

Meeting David turned out to be very well timed – because since the June 2 election the Peso dropped from 16.37 (Pesos to the $1) to 18.24 (roughly 11%).? While that’s great news for those of us who are changing our US$ to Pesos tomorrow, it’s going to be a tougher conversation for people who did it last week.? That’s why you need to know someone.?

Meet the Mexican Peso:

The USD-Peso is considered an “exotic” trade in Forex World - it is the 12th most traded pair – which is solid but not huge.?

Since the 11% post-election drop, I’ve been doing some research about the mechanics of buying & moving Pesos.

?About 60% of Peso’s volatility comes from international & geopolitical forces.? This makes sense if you consider the Peso’s steady rise as the US-China trade conflict accelerated.? The trade most of us watch is Peso-US$ - which are equally affected by many geopolitical events.

30% of Peso movement comes from local risk factors – including interest rate differentials, local monetary policy -- and the fallout from local elections.? Almost all medium-term factors support a stronger Peso.

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Questions for David McCormack of Monex USA.

1.????? Can you give us an overview of the current state of the US Dollar to Mexican Peso exchange rate and its recent trends?

The Mexican peso (MXN) trended higher against the US dollar (USD) for most of 2022 and 2023. Juan Perez, Monex’s Director of Trading, noted that MXN benefitted from Mexico “. cooperating closer than ever with American private interests.” Link in Comments

Recently however, MXN dipped down to its weakest point against USD since December after elections on June 2. Claudia Sheinbaum’s victory and Morena Party gains in the legislative chambers contributed to volatility for MXN. The peso forecast for 2024 is mixed. Morena Party policies could result in a continued slide for MXN. However,? if Banxico maintains a steady hand on interest rates, it may encourage continued foreign capital inflows, and provide a source of balance for MXN.

2.????? What are the main factors influencing the US Dollar to Mexican Peso exchange rate, and how might these impact businesses considering nearshoring to Mexico?

Foreign investment and steady interest rates have contributed to higher MXN rates in recent years, with a break from the trend after the recent election, resulting in a 4% swing in USD/MXN. Businesses may not be prepared for this volatility and while a short-term dip is a boon to those buying MXN, the volatility needs to be considered as a risk to profit margins.

3.????? What strategies can businesses employ to mitigate currency risk when conducting transactions between the US and Mexico?? What solutions does Monex offer to streamline these processes?

Monex USA has close ties to the Mexican market through our parent company, Banco Monex. Monex is consistently the #1 ranked Bloomberg currency forecaster, and we share our MXN peso insight to help guide clients through the currency market. In addition to expert forecasting, solutions to mitigate the currency risk include competitive rates of exchange, forward and option contracts on FX.

Monex USA offers same day MXN payments for time-sensitive delivery, with 4pm EST cutoff time, the latest in the market. On-time deliveries are executed without intermediary lifting fees.

4.????? What are some common mistakes businesses make regarding currency exchange when nearshoring to Mexico, and how can they be avoided? Businesses may underestimate the effects of currency volatility on the bottom line. Unlike the Chinese yuan, which is closely managed, MXN can fluctuate widely against USD, as we saw this week after the election. The past year has seen USD/MXN fluctuate by around 16% compared to USD/CNY at under 8%.

Businesses nearshoring to Mexico should consider what a 16% swing in exchange rates can do to their profit margins and schedule a free consultation with Monex to learn about hedging solutions.

5.????? Monex's Expertise: Beyond currency exchange, what other financial services or tools does Monex offer that can be valuable for US companies entering the Mexican market?

Monex USA offers foreign currency (FX) holding accounts. While your US bank may convert FX into USD automatically, Monex allows clients to hold MXN, among other currencies, and convert when rates are favorable or use MXN holdings to pay vendors, further reducing exchange costs.

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Final Word:?

Success in Mexico is about developing the right team of professionals and advisors.? In Asia and MENA, networks of service providers seem to pop up around you.? That’s less true in Mexico, where most of the expertise is in manufacturing or logistics.

Mexican networking is straightforward enough, but there are a few local factors to consider.? You always need a lawyer, account, and HR manager no matter where you are.? In Mexico, you have to develop some relationships that aren’t standard in Asia.? You need a customs expert.? You will probably have several logistics people.? When it comes to banking & finance, taking the time to build the right relationships early can make your life much easier down the line.