Columbian Peso Volatile As Commodity Prices Fluctuate

Posted September 09, 2009

Mexico's credit rating is threatened by downgrading as 2010 budget shortfall looms. The yen weakened against the euro for the sixth straight day. The Canadian dollar fell against the US dollar.


It’s really difficult to not feel some sympathy for Mexico.  Between the recession and the swine flu the country has had to battle duo threats to its economy over the last 6 months.  And now it must face the possibility of a credit rating downgrade within the next month.

Mexico is facing a credit rating downgrade as the government attempts to balance a massive 2010 budget deficit.  The last downgrade was in 1995 and a lower credit rating in the new fiscal year would be a real blow to recovery efforts.  President Felipe Calderon has proposed new tax increases that would generate additional revenues but the fear is that the increases would not be enough.

The proposals for balancing the budget also include expense reductions.  But analysts are saying the proposals will not generate the revenues needed to prevent a downgrade.  All proposals to date are seen as being too weak for the struggling economy.

The yen weakened again against the euro for the sixth straight day.  The yen fell against the euro to 134.13 yen per euro.  The yen’s weekly decline is attributed to the good economic news coming out of China.  China is not only experiencing a 90 percent increase in auto sales, but it is also experiencing an increase in manufacturing.  Anticipated reports say that manufacturing increased by 11.8 percent for August.  China has been focusing on implanting domestic stimulus programs that seem to be already working.

In addition, the US dollar fell again against the euro to $1.4557 per euro.  The yen fell against the US dollar to 92.13 yen.  Investors are moving towards emerging market higher yielding assets.

The Canadian dollar held against the US dollar even as housing starts rose. The Canadian government has publicly indicated it has concerns with the strengthening currency.  A stronger loonie can make economic recovery more difficult due to its impact on exports.  The current interest rate is at .25 percent and the central bank has said it plans on leaving it unchanged.

The Canadian dollar fell to C$1.0794 against the US dollar.  This means that one Canadian dollar will purchase 92.64 US cents.

The Columbian peso rose to 1,989.42 pesos per US dollar.  Strategists for Standard Charter, Mike Moran and Douglas Smith, were quoted as saying, “Colombia’s heavy commodity-orientation will keep the peso sensitive to the outlook for global commodity prices and demand. We are seeing growing evidence that global growth is bottoming and stronger numbers in the U.S. and Asia will likely remain core themes in the second half of this year.”

The global economic recovery continues to be uneven even as government policy makers try to determine how to best unwind stimulus packages.  The real threat now is the possibility of raging inflation as economies begin to recover. Many analysts believe the US dollar is set for a hard fall over the next 6 to 12 months. 

US Treasury Secretary Timothy Geithner has been trying to assure European leaders the US government is prepared to deal with the unwinding of economic programs while keeping a handle on the US dollar value, but many remain unconvinced.  It is a major reason why the US has had a difficult time garnering European support for a unified response to issues like financial industry bonuses and stimulus unwinding plans.