January, 2007

Mexican Peso / Monthly Exchange Rate Monitor

Executive Summary

> During December, the peso gained 1.7% (from 10.98 to 10.80 pesos/dollar). As we had anticipated, the Mexican currency ended the year heading toward 10.70 pesos/dollar. Indeed, in the first two trading days of January the peso reached levels around 10.75. It is worth to mention the peso rally of the second half of 2006. The peso fell even to 11.49 pesos/dollar during the March- June period, but then from June 14th to December 29th it gained almost seventy cents against the dollar. Despite the large pre elections depreciation, the Mexican currency averaged 10.90 pesos/dollar in 2006, only one cent above the 10.89 average of 2005.

> We expect the peso to trade mainly between 10.80 and 11 pesos/dollar. If the Mexican currency takes the 10.75 floor, it could head toward 10.70-10.68 pesos/dollar. Meanwhile, it will be difficult for the peso to trade permanently above 11 pesos. It is worth to remember that according to historical evidence, when the peso gains ground in December, it tends to extend its gains in January.

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December, 2006

Economic Outlook

In the United States:

Spillover effects from the cooling housing market will be larger in coming months mainly in durable goods production and furniture and home furnishing retail sales. In this context, payrolls in construction and in the overall goods producing sector will continue to fall. Nonetheless, it is worth to notice the services sector is still growing at a solid pace and creating much more jobs than those lost by the cooling in the housing market. As the Fed said in its most recent monetary policy meeting, economic growth will moderate in coming months, but it will remain out of recession ground.


In Mexico:

Industrial activity will clearer reflect the US industrial softening in the first half of next year. Nonetheless, investment growth and job creation could remain solid. Economic growth rate will moderate during 2007. Meanwhile, recent inflationary pressures have begun to ease. Lastly, so far this month, the Mexican peso has gained ground against the dollar and it could eventually head toward 10.70 pesos/dollar.




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