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The Peso’s Fairly Smooth Year in 2021 and Estimates for 2022

Mexico's peso was fairly stable against the US dollar in 2021, supported by prudent policy decisions and a recovering economy after a tumultuous 2020

Mexican banknotes 500 pesos

Following 2020’s wild ride with the Mexican economy suffering its steepest recession in decades, the peso was fairly stable against the U.S. dollar in 2021, but still ended the year down about 3%.

A stable year after a tumultuous 2020

The exchange rate fluctuated between 19.56 and 22 pesos per dollar during the year, finally closing out December at 20.50.

Unlike the previous year, there were no major upheavals to send the peso anywhere near to its previous low levels. The economy continued to recover in the first half of the year, although the third quarter saw a slight drop as services were affected by renewed Covid-related capacity restrictions at restaurants, malls and other public venues. Those were mostly lifted by September.

The peso was supported by several factors in 2021

Gross domestic product, which measures output of goods and services, is expected to have grown by 5.6%, recuperating much but not all of the 8.2% drop in 2020. Employment returned to pre-pandemic levels, and tourism picked up from a disastrous 2020 without yet returning to 2019 levels.

The loss of economic momentum in the second half of the year, and a rise in inflation to 7.4%, the highest since 2000, were negative for the peso. On the other hand, the Bank of Mexico raised interest rates to counter the inflation pressures, and remittances from the US continued to set new records, reaching nearly $47 billion by November, already more than the $40.6 billion received in all of 2020.

Also supporting the currency was that, unlike in many other emerging markets, the Mexican government didn’t go on a borrowing spree to support the economy during the shutdowns of 2020, and avoided raising public debt to levels that could compromise its credit ratings. The lower debt load supports Mexico’s credit ratings, and therefore the peso.

What to expect for the peso in 2022?

Mexico’s peso is a free-floating currency on the world’s foreign exchange markets; it’s among the world’s top most-traded currencies and is the most-traded of Latin America’s currencies.

The latest central bank survey was undertaken in mid-December 2021, with analysts estimating the exchange rate will end 2022 at at rate of 20.65 pesos to the US dollar—close to its current level.

Other forecasts in that survey are that the Mexican economy will grow 2.8% this year and that inflation will slow down to 4.2%.

Currency forecasts reflect what could be expected given estimates for inflation, economic growth, interest rates and other economic variables, both in Mexico and the US, but they don’t consider extraordinary events as these are unknowns.

As we have commented on these pages before, exchange-rate predictions are subject to many uncertainties and are seldom accurate. Consensus estimates go up and down throughout the year as the exchange rate fluctuates.

Other things that influence the peso’s value

What determines the exchange rate in the market are investors who buy pesos to invest in Mexican stocks and bonds; or dollars to shift money into US investments; companies that buy dollars to pay for imports or to make foreign debt payments, or that buy pesos to exchange dollars earned from exports; banks that receive remittances in dollars and pay them out in pesos; and of course, international travel which tends to favor Mexico with a surplus given its popular tourism resorts.

Aside from the U.S. dollar, the Bank of Mexico publishes indicative daily rates for the peso against a number of other currencies, including the Canadian dollar, the euro, and the yen.

New banknotes introduced in 2021

The Bank of Mexico issued two elegant new banknotes in 2021, a new 20-peso bill and a new 50-peso bill, which completed a banknote update program that started in 2018 with a new design for the $500-peso bill.

It also put into circulation a number of new 12-sided 20-peso coins commemorating historical events including the foundation of Tenochtitlan, the consummation of Mexico’s independence and the 100th anniversary of the death of revolutionary hero Emiliano Zapata.

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