Understanding global business demands a deeper comprehension of world economies, knowing how they transact and conduct trade in terms of currency and exchange. Foreign exchange markets play an essential role in world economies by ensuring that cash flow from one currency can be converted to the other (Benavides 41). Foreign exchange market is a platform that involves an individual changing the currency of a given currency to another. Analysis of exchange rate dynamics has, therefore, become a crucial financial topic in the world whereby international markets have become integrated.
Exchange rates may, therefore, influence investment decisions and have an influence on the economy of various nations. Currencies in the financial markets are known to fluctuate over time, a factor that has been attributed to the fluctuating economies, political legislation, among other things (Benavides 41). Understanding the implications of these exchange rates markets is, therefore, a vital deed as it enables an assessment of various currencies. This paper shall analyze the Mexican peso and its ETF in emerging markets. Mexico is the second largest economy in Latin America after Brazil their economy one of the promising emerging markets worth investing in.
Mexico has adopted some of the best exchange-traded funds (ETFs) allowing external investors to be exposed to the country’s economy. Some of the EFTs that the Mexican economy utilizes include the iShares MSCI Mexico Capped ETF (EWW), Deutsche X-trackers, QMEX, and the UMX. These exchange-traded funds are, therefore, giving external investors a platform for the exchange of currencies (Imbert). The ETF is dependent on the currency value at the markets and fluctuates based on various market factors. ETFs success in the industry is reflected in its complexity and broadening the scope in the markets (Aggarwal et al. 79). ETFs are designed in a way that enables a currency to replicate the performance of a given benchmark index, in this case, the Mexican peso against the US dollar.
The Mexican peso has encountered massive fluctuations over the last few years compared to the US dollar. At some years, the currency improved its value relative to the dollar, while in some years it recorded a slight loss of value. In 2013, the Mexican peso lost its value over the US dollar by about seven and a half percent. The situation, however, worsened in the year 2014 when the prices of exporting oil dropped (Hsu et al. 188). With the fall in prices, the country suffered a fall in the foreign currency revenue leading to the depreciation of the currency. The fall in oil prices would shake the country’s economy since it was a leading exporter of oil. The peso further depreciated in 2015 because most investors opted to abandon emerging market stocks and currencies and choose profitable assets like the United States government bonds (Hsu et al. 189). With the dumping of the peso and the emerging markets, the Unites States dollar received a boost as the Mexican peso depreciated. The accumulated depreciation of the Mexican peso over the U.S. dollar stood at 27% in 2015 (Aggarwal et al. 77)
In 2016, Brexit worsened the situation of the Mexican currency. The Mexicans had hopes of revamping their economy, something that was shattered by the success of Brexit referendum. Because of the exit, the Mexican peso’s price further sunk low relative to the dollar. In the same year, the country’s economy became devastated after Donald Trump was elected the President of the United States (Imbert). After his campaign and hard stances on foreign policies, the investors had developed pessimistic attitudes that weakened the peso further since they were walking out of investments in the country. Trump’s victory saw massive withdraw of investors from the emerging markets, resulting to a 14% decrease of the peso in three days, a result attributed to an anticipated attack on NAFTA by the Trump administration. Despite all these hardships that the peso has undergone, it recorded a significant improvement in 2017.
The end of pessimism by investors give the peso a kick start and was boosted by the weakening of the dollar. The Mexican peso appreciated massively, from one of the poorest currency to one of the best in the globe. During this year, the currency increased by more than 15% against the dollar as well as spiked by approximately 20 % since it became the lowest currency (Imbert). In 2018, the Mexican peso has maintained a positive value relative to the dollar. Investors have continued to invest in the country’s emerging markets, enabling the country to record an economic growth of 2.6% by the end of the first quarter.
Mexico’s ETF has, therefore, received a major boost due to the gaining of the peso. The iShares MSCI Mexico Capped ETF (EWW) noted a rise of up to 30% in 2017. This increase in ETF is attributed to three factors that include the rise of the peso currency that resulted in two-thirds of the increase posted by EWW (Imbert).
In conclusion, the Mexican peso and the US dollar are linked in some way since the Mexican economy is dependent on that of the United States. With the peso’s currency gaining over that of the United States, the country’s economy was revamped ensuring a stable inflation that has made investors invest in the same country. The countries emerging markets have widely competed the United States equities. The Mexican stocks have, therefore, won the hearts of many investors given the 30% surge its EFT recorded compared to the 11% that the US equities recorded. The success of this EFTs has been linked to the appreciation of the currency and the slightly better economy.
