I recently sold my motorcycle. I now have 84,000 Mexican pesos. That equates to about seven years of my current rent. So, I don’t need it immediately.
My question is, would I be better off trading the pesos for US dollars? I don’t use dollars here. So, I would need to convert them to pesos again. So, commissions on both ends.
I realize that things are kind of up in the air with the new POTUS. But, would appreciate any advice. Right now the pesos is trading at 20 to the US dollar. Which is an all time high. At least for the ten years I have lived here.
According to this
Set currency = MXN and Range = 5 years.
Mexican currency has depreciated around 50% in the last two years.
The interest Mexican banks are paying on peso is about 5-6% a year.
Makes sense to buy $$.
Assuming the economy/politics stay roughly the same.
No one knows what the future exchange rate will be, so it’s not like someone will have a magic correct answer for you. Public information about the uncertainty of the future is already priced into the current rate.
On average, paying exchange fees twice is going to turn out worse for you, so that’s a reason not to do it. If the rate is at a historic high, that’s another indication that it’s probably a bad time. Reversion to the mean is a real thing.
If you don’t need the money for a long time, invest it in something simple and likely to generate actual income. Forex investing is not for the small time investor, and is a zero sum game (worse, at the retail level, since you pay several percent in fees).
One can be assured that Trump will never, ever do anything that will aid the Mexican economy in any way, he may even be hell-bent on destroying it intentionally, so I’d consider the peso to be in the early stages of free fall. One indicator is that there has been no bounce back at all after panic trading on election night. It’s not really a huge amount of money, only $4,000 or so, I’d convert it now to US, you can always spend US dollars on a daily basis in Mexico.
Only if you want to bet on the currency markets. If all of your payments are denominated in pesos, you really have no use for US dollars. As already mentioned, no one knows what the dollar to peso ratio will be in the future. Mean reversion isn’t applicable. The relationship between the two currencies isn’t stochastic, it’s deterministic, i.e. there are real world events and decisions, that haven’t happened yet and that can’t be predicted, which will drive the ratio in the future. What you do know is that you will need to make payments in pesos. If you want to minimize any risk, and having 8 years of rent saved up is a pretty compelling argument, it’s best to keep the funds in a bank (and perhaps in a short-term money market vehicle that will allow your balance to continually adjust for inflation).
Jackknifed’s answer emphasized the most important aspect more directly than previous answers: OP says his eventual liabilities, ie what the proceeds of the motorcycle sale will eventually be spent on, are in peso’s. That means hold the money in peso’s, unless you want to be a currency speculator, which one obviously shouldn’t be at this time if asking this basic a question on a general info forum.
There could be further general discussion about expected value or historical average results in holding a currency like the MXN which has just gone down a lot v USD, or which has a high yield, and the ‘efficient market’ explanation would not always match what has happened on average historically. However the conditions described in the first paragraph mean: hold peso’s.
Unless you get a better bargain from a guy on the corner - typically, the buy and sell spread at banks (at least, mine) is about 2% or 3% on Canadian and US dollar. Convert to dollars, back to pesos - lose 5% or so of value. I bet, even higher for currencies like the peso. So it’s a bet - will the peso go down that 5% (plus interest) or more before you need it?
It’s a pretty good bet that it’s not going to climb much any time soon. But this is the reason it’s called currency “speculation”. Who knows? Nobody.
Yes, that’s what I meant - there are private or semi-private citizens who might be willing to give a better deal or exchange than the banks. but still, what happens in future with exchange rates is a crapshoot.
Thank you very much for the information. I really appreciate your time in responding.
Sorry to bother you with such a paltry amount. But, it is a lot of money here. Just trying to stretch it a bit.
As for the questions about what my rent gets me. It is a room with a bath. No hot water. But, you really don’t need it here in the tropics. There is a stove and oven outside. And an area to wash dishes. I have a large patio and a huge garden.
I pay for electricity ($10/month) and internet ($8.00/month).
If you are planning on moving back to the US it may make some sense to hedge, by putting some (half?) of your money in US dollars (or look at currency futures). However, if you are planning to stay in Mexico there is no reson to change any of the money to US dollars unless you want to gamble on future exchange rates. i.e., Do you know something we don’t know?
Some suggest that the Peso has as good a chance of appreciating against the dollar as of declining. Do the currencies of less-developed countries often appreciate? I do not have a cite, but I doubt it. This doesn’t contradict the “efficient market hypothesis” — some price movements follow long-term trends.
A separate question: Will Mexican banks sell you dollars without restriction? During the late 20th century many important countries did not have fully convertible currencies; has the situation changed that much?
The spread difference is the total roundtrip charge; no need to double it. Buy a shilling for $1.02, sell it back for $1.00, and you’ve lost 2%, not 4%.
Round-trip conversion at a Thailand bank, baht-dollar-baht, loses less than 2% for $100 banknotes and less than 1% for wired funds (although this may end up 2% or more when wire fees are included.)
Currencies where interest rates are higher have historically tended not to depreciate against ones with lower interest rates as much as they ‘should’. IOW in the forward FX market a currency with a 1% higher (short term, ‘riskless’) interest rate will be 1% cheaper in a trade where the currencies will be exchanged 1 yr from now but where the rate is agreed to now, than in an exchange now agreed to now. If it were otherwise, traders could reap free money.
However if one holds the higher interest rate currency, in general on average in history, it depreciates by less than 1% over the following year v the lower interest rate currency. That’s called the carry trade, which is arguably an anomaly wrt to ‘efficient markets’ (although there are hypotheses how it could actually reflect secondary risks, it doesn’t actually practically matter). The point is that has worked more often than not, but doesn’t necessarily work in any given case, and may not tend to work more often than not in the future, it just has tended to in the past.
Separately, assuming the ‘developing’ countries are on an eventual trend to close the gap with rich ones, their currencies should eventually move closer to Purchasing Power Parity with rich country currencies n the long run. That is, in general if you convert the GDP per capita in poorer countries at market exchange rates, it comes out lower than the GDP per capita at Purchasing Power Parity, which is corrected for the tendency of non-traded goods to be cheaper in poorer countries when converted at market exchange rates. One might reasonably hypothesize that that difference, between at exchange rate and PPP GDP’s per capita should narrow in longer run, IOW the currencies should converge to PPP.
However whether that really makes it a positive expected return investment to hold developing countries’ currencies (as an investor with mainly USD or rich country currency liabilities) is another question.
Here’s a pretty well thought of quant shop’s projection of 10yr expected returns in USD for various asset classes. One of the highest return for risk assets is emerging market currencies. https://www.researchaffiliates.com/en_us/asset-allocation/fixed-income.html
It you look under the hood of this, their modelling is not a lot more complicated than my simple and vague explanation above. It’s just one opinion, needless to say, and not especially mine. This would have been a pretty disastrous strategy lately, though as we all know that doesn’t mean it will or won’t be from here.
Again though, if OP needs peso’s to spend eventually and has them now, the obvious choice is to hold peso’s. The only caveat would be if there’s concern about Mexican banks, but that’s not a huge concern at the moment AFAIK.
ETA: you might have to mess around more on that page to get the graph I was looking at. It’s under ‘asset allocation’. Anyway if you see a graph where emerging market local currency bonds are the top investment, a lot of the reason for that is the same, again according to Research Affiliates analysis and opinions.
explanation above. It’s just one opinion, needless to say, and not especially mine. This would have been a pretty disastrous strategy lately, though as we all know that doesn’t mean it will or won’t be from here.