Explain several different factors that have an influence on exchange rates including relative interest rates, relative income levels as well as relative inflation rates between countries.

I need a response for the following discussions: I need 137 words each response.

1- By Rusty: This is an interesting scenario, because it involves the issue of how exchange rates of neighboring countries can have an impact on businesses that operate in each country. I am from a border city, and I am familiar with many different types of business that are largely affected by the Dollar/Peso exchange rate.

The text outlines several different factors that have an influence on exchange rates including relative interest rates, relative income levels as well as relative inflation rates between countries. In addition, the text details government controls as well as people’s expectations about a country’s future as factors that influence exchange rates.

I believe that one of the biggest factors that could influence exchange rates between Mexico and the United States is the income of Americans. Mexico is heavily reliant on Americans to consume products developed in Mexico. One of Mexico’s biggest exports is Automobiles. (1) If there were to be a recession in the US economy, I believe the peso would devalue against the dollar by virtue of the fact that Americans would have less money to spend. Since the economy of Mexico is largely dependent on the exportation of vehicles, I believe that its economy would suffer as well in addition to the fact that its currency would lose value.

An additional factor that could devalue the peso in relation to the dollar is expectations of future conditions. Another large export from Mexico is oil. The Peso has recently lost value against foreign currencies because of a drop in oil prices. Here is the link to an article detailing this occurrence: http://www.theyucatantimes.com/2014/12/the-mexican-peso-has-fallen-12-since-june-against-the-dollar/

Although a variety of factors and a mix of conditions could impact the value of the Peso, I believe that these macroeconomic factors that would have a direct effect on Mexico’s main exports would influence the value of the Peso the most.


1. (http://www.worldstopexports.com/mexicos-top-exports/2636)

2- By Josh: Both investment cash flows and current account changes could impact the MXN / USD exchange rate. These potential changes would impact business operations in Mexico differently depending on whether operations mainly involved export sales to Mexico or imports of goods or services from Mexico. Business impact will also be different if the company obtains financing from US or Mexican markets.

A company with sales operations in Mexico would benefit from a rising MXN, which would make goods more competitive in the Mexican market and translate to higher profits when converted back to USD. Conversely, a falling MXN would make prices less competitive and translate to lower USD profits.

On the other hand, a company with manufacturing operations in Mexico would benefit from a weaker MXN. This would reduce the USD cost of goods, increasing profits. A higher MXN would increase the cost of goods produced in Mexico, hurting companies with manufacturing in Mexico.

Exchange rates could be impacted by a variety of macro-economic and policy factors. For example:

•Weak economic growth in Mexico could result in reduced consumer spending, including weaker imports. This could reduce the demand for USD, resulting in a rise in the MXN relative to the USD.

•The Mexican Central Bank could increase interest rates in order to increase the demand for investments in MXN. As long as this is not matched by higher inflation, this would generally increase the value of the MXN relative to the USD.

•Inflation could be higher in Mexico than in the US, resulting in more demand for US goods, which are less expensive due to the difference in inflation. This would result in a decline in the MXN to adjust for the trade imbalance and restore Purchasing Power Parity.

•Currency speculators could anticipate a future change in the exchange rate, impacting demand for the currency and the resulting exchange rate.

All of these scenarios could realistically happen. The Mexican Central Bank could intervene to try to stabilize the currency, but they are likely to focus on those changes that would slow the growth of the Mexican economy or result in problematic levels of inflation. An increase or decrease in interest rates to maintain steady economic growth and control inflation levels is very likely. Also, changes in consumer demand are likely at different points in the business cycle.

A company has a variety of tools to manage foreign exchange risks by matching the timing MXN cash inflows and outflows. This could involve a future or forward contract, or an option to lock in future exchange rates to meet the needs of a payment to a supplier, or future receivables to USD. Obtaining financing in MXN could also help to match future interest payments with future sales in the same currency, reducing the negative impact of a potential decline in the currency.

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