Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Mexico Nearshoring Hits a Wall as the Peso Strengthens
Transcript
- Lucas: Let's talk about the Mexican peso. Because if you're following the nearshoring story — and honestly, who in emerging markets isn't — the peso's become one of the biggest wild cards of 2026. Luna: I've seen it. The peso is up against the dollar, and that's usually a good sign. But for nearshoring, it's a double-edged sword, right? Lucas: Exactly. The trade-weighted dollar index hit 119.3 as of mid-May. That's a strong dollar by any measure. But the peso has actually strengthened against the dollar, meaning it's even stronger relative to other currencies. Luna: So while the dollar is strong globally, the peso is stronger. That makes Mexican exports more expensive for US buyers. Lucas: Precisely. And when you're a manufacturer deciding between setting up in Mexico, Vietnam, or India, labor costs matter. But so does the exchange rate. A stronger peso eats into your margin. Lucas: Look at the iShares MSCI Mexico ETF, ticker e w w. It's up 0.8% over the last five days. That's not bad. But compare it to the Korea ETF, e w y, which is up 4.2% over the same period. The market is already pricing in some of this currency risk. Luna: So are you saying the nearshoring boom in Mexico is peaking? Because we've been hearing for years that Mexico is the big winner from us china trade tensions. Lucas: I think the trend is still intact, but the low-hanging fruit is gone. Early movers locked in cheap labor and favorable exchange rates. Now, new entrants face a peso that's up roughly 8% year-to-date. That changes the math. Luna: And that's before you factor in wage inflation. Mexican factory wages have been rising too, especially in border cities. Lucas: Right. So you've got currency appreciation plus wage growth. That's a double hit. The question is whether Mexico can offset that with productivity gains or infrastructure improvements. Luna: But isn't a strong peso also a sign of a healthy economy? It means capital is flowing in, foreign investment is real. That's not a bad problem to have. Lucas: It is a sign of health — in the macro sense. Mexico's current account deficit has narrowed. Exports are up. But for the manufacturing sector specifically, it's a headwind. And the central bank, Banxico, is in a tough spot. If they cut rates to weaken the peso, they risk inflation. If they hold, the peso stays strong. Luna: So what's the play for investors? Do you lean into Mexico or look elsewhere? Lucas: I think you have to be selective. Sectors tied to domestic demand — like consumer goods or financials — might benefit from a strong peso. But export-oriented manufacturing, especially auto and electronics, face margin pressure. Lucas: And I'd watch the Taiwan and Korea ETFs. They've been rallying on the tech cycle. E-W-T is up 3.5% in five days. That suggests money is rotating into markets with weaker currencies and strong export sectors. Luna: So if the peso stays strong, could we see a shift in nearshoring away from Mexico? Maybe toward Southeast Asia? Lucas: That's the big strategic question. Vietnam has been a beneficiary. India too. But Mexico has proximity to the US market — that's a logistical advantage that currency alone can't erase. The question is how much premium companies are willing to pay for that proximity. Luna: You mentioned Korea and Taiwan. Their currencies have been weaker, but they also have very different supply chains. They're more about semiconductors and electronics than the automotive and appliance assembly that Mexico specializes in. Lucas: Good point. It's not a direct substitution. If you're making car seats or wiring harnesses for a US assembly plant, you can't just move that to Taipei overnight. The supply chain is deeply integrated. Lucas: But for new investments — greenfield projects — the calculus is different. I've spoken to consultants who say the pipeline of new nearshoring projects in Mexico is still strong, but the pace of announcements has slowed since Q1. Companies are taking longer to decide. Luna: And that ties into what we're seeing in the headlines. The US dollar is still strong, the trade deficit is widening — imports are up, exports are up too, but imports more so. That's a reminder that US demand remains robust. Luna: If the US economy stays strong, it pulls in more goods from everywhere. Mexico still benefits from that. The question is whether the benefit is diluted by the peso. Lucas: Exactly. And the dollar index at 119 suggests the Fed is still in a tightening bias relative to other central banks. That's a global factor. But Mexico's central bank has been ahead of the curve on rate hikes, which is partly why the peso is strong. Lucas: So you've got a classic tension: monetary policy credibility versus export competitiveness. Banxico has built a lot of credibility by fighting inflation aggressively. That attracts capital. But it also makes exporters' lives harder. Luna: Is there a historical parallel? Other emerging markets that had successful nearshoring booms and then saw their currencies appreciate? How did they handle it? Lucas: Thailand in the 1980s and 1990s is a good example. As foreign investment poured in, the baht strengthened. They managed it by pegging to the dollar for a while, but that eventually led to the 1997 crisis. So pegging isn't a great idea. Lucas: Chile used capital controls and a stabilization fund. But Mexico has a floating exchange rate and an independent central bank. They're not going to intervene heavily. So the peso will find its own level. Luna: So the message for our listeners: If you're investing in Mexico, don't just look at the nearshoring narrative. Look at the currency trend. And maybe diversify across emerging markets. Lucas: That's fair. And keep an eye on the Federal Reserve. If they cut rates later this year, the dollar could weaken, and that would take some pressure off the peso — actually, it would weaken the dollar, so the peso might not strengthen further. It could stabilize. Lucas: But if the Fed holds, and Banxico holds, the peso stays strong. And the nearshoring story becomes more about quality and productivity than just cost. Luna: I think that's actually a healthy development. Mexico shouldn't compete solely on cheap labor. A strong peso forces companies to invest in automation, training, and higher-value production. Lucas: I agree. The best case scenario is that Mexico moves up the value chain. But that takes time. In the short term, there will be some pain for exporters. We're already seeing it in the auto sector margins. Luna: So bottom line: Mexico's nearshoring wave isn't over, but the easy money has been made. It's now a stock-picker's game within the country, and a broader EM allocation question. Lucas: Well put. And on that note, we'll keep tracking the peso. It's one of those indicators that tells you more about the real economy than any GDP number.