Why the Mexican Peso is at fair value
The Mexican Peso has had an average of 5% inflation YOY over 10 years. The value of MXN compounded as an asset price would have a fair value of true value of approximately 20.66.
Inflation is just one contributor to a currencies value. A higher interest rate can attract foreign investment from investors but a low-interest rate will make investors less willing to take currency risks. Political risk and economic performance also have a significant impact on currency. The higher the risks and the lower the interest rate the less foreign investors will want that currency.
Typically a currency will trade in a sideways range until an event. The event will allow the currency to break out, putting it into a new range. Although in the short term the rapid appreciation or depreciation may seem exaggerated they are typically just adjusting into the longer-term trend
Inflation is just one contributor to a currencies value. A higher interest rate can attract foreign investment from investors but a low-interest rate will make investors less willing to take currency risks. Political risk and economic performance also have a significant impact on currency. The higher the risks and the lower the interest rate the less foreign investors will want that currency.
Typically a currency will trade in a sideways range until an event. The event will allow the currency to break out, putting it into a new range. Although in the short term the rapid appreciation or depreciation may seem exaggerated they are typically just adjusting into the longer-term trend
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