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“The demagogue is one who preaches doctrines he knows to be untrue to men he knows to be idiots.”

                           H. L. Mencken

FX Trading – Arizona Boycotts the Peso

When the “moral champions” of the world gang up on Arizona, Arizona sells pesos.

That seems to be what happened this week in the wake of Arizona’s crack-down on illegal immigration.


Okay … maybe that’s not exactly it!

There’s a pretty good chance Arizona had nothing to do with the peso’s fall. Especially when you look at the fact that the peso has, since February, pretty much hitched a ride on the risk-taking express.

MXNUSD Daily and S&P 500 Daily

Hombre, that’s a pretty tight correlation if I ever saw one.

And I want to say there’s a simple connection here: the S&P has been rockin’ and rollin’ because of signs of recovery in the US; and the Mexican economy is tightly hinged on the US economy.

But what if Arizona has set the precedent on immigration reform? What if the derelict federal government (or several other state governments) follows Arizona’s lead?

Mexican President Felipe Calderon seems to think Arizona’s law is a big deal; and he doesn’t appear to like it one bit because of its potential to breed intolerance and hate.

First, why should Mr. C have any say in the enforcement of immigration laws in the US?

Second, why should Mr. C have any say in the enforcement of immigration laws in the US?

That’s right – the answer to both questions is: he shouldn’t.

But did I mention he referred to immigration as a “social and economic phenomenon”?

Hombre, think of the burden it lifts off the Mexican government’s shoulders when he can see off hard-working citizens to find jobs in the US and repatriate money back to relatives in Mexico.

Remittances have bounced back sharply, as of the end of March:

And another thing: there have been some outlines of an amnesty bill in the US that would actually send US taxpayer money to Mexico, incentivizing Mexicans to stay in Mexico. It’s like an economic stimulus bill that Mexico doesn’t even have to pay for.

Why would Calderon approve of the US cracking down on illegal immigrants as a way to deter Mexicans from entering the US when he can have it both the ways he wants it – a recovery in remittances and the US government sending money to Mexico?

Ultimately this whole immigration thing has come down to the economy in Mexico. Mexicans are not fleeing to the US because of political oppression or anything similar; they’re coming for jobs (and perhaps the American Dream, though I hear that may become unavailable soon.)

So what is Mexico’s economy doing to deserve such flight?

The head of Mexico’s Central Bank, Agustin Carstens, recently said the Mexican economy could end up growing 4-5% this year. That’s nothing to shrug about. An estimate on first-quarter growth, due out tomorrow, is expected to exceed 4%.

But Carstens isn’t completely satisfied. Consumption and investment are sluggish still. It is the industrial complex that is making the difference in growth.

Consumer Confidence is Struggling

Ditto for Gross Fixed Investment

And here’s another chart that might indicate a reason why Mexican’s who’ve exhausted all efforts must resort to the US:

It shows the year-over-year percent change in consumer credit. Note that the most recent data is from the end of 2009. Quite a dramatic collapse that apparently is not expected to rebound very quickly, keeping the domestic economy tied and leaving Mexicans scurrying for financial solutions.

Despite the fact that Mexican banks anticipate lending growth of 10% this year, apparently those loans are mostly bound for businesses, not consumers.

Strict regulations let Mexico avoid the fate of many economies during the recent financial crisis. But as it works its way out of decline, it may want to consider loosening up the reins to get its domestic sector pumping again.

But regardless of the steps Mexico takes, and makes, the peso may be stuck on the S&P 500 and the US economy for a while still.

MXNUSD Weekly and S&P 500 Weekly