Navigating Mexico: Why Now Might Be a Good Time to Hedge

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If you are a digital nomad, with some or all of your income coming from outside of Mexico, right now might be the time to consider some financial “hedging”

While many are familiar with hedging in a stock fund, for the international citizen, a different kind of hedging is at play that has nothing to to with the stock market. And you do not need to be financially savvy to consider it.

Three factors are currently at play: the Mexican peso versus your home currency exchange rate, the local bank interest rate versus your home country bank interest rate for savings, and, finally, the inflation rate in both countries. This third factor is likely less significant if you are living in Mexico since countries like the United States and Canada have more or less comparable inflation.

Hedging could be financially viable with today’s current percentages. The peso-dollar exchange rate has been basically stable during the past few years, hovering around 20 pesos to the U.S. dollar.

But compared to the Central Bank of Mexico’s (Banxico) CD-type 30- 60- and 90-day deposits, known as Federal Treasury Certificates (CETES), the recent percentage increases have been substantial, raised on March 15 from 6 percent to 6.5 percent, with the Bank of Mexico scheduled to meet again on May 15, to once again consider interest rates. In just a year, this rate has gone from 4 percent to 6.5 percent. In the United States, for example, the interest on a savings account has remained basically unchanged for years, earning next to nothing.

So? How does all of this impact you?

If your funds are sitting, for example, in the United States, with a bank interest rate of 0.5 percent, you are losing spending power in Mexico, if your expenses truly are in pesos, as the interest rate in Mexico is currently 6.5 percent on savings.

So where is the hedge? Because of such a favorable interest rate, you are “hedging” against the peso exchange rate basically staying constant, as it has during the past 18 months.

Where does this concept come from? For the past 10 years, as a best practice, international businesses have been doing this for the full budget year for their dollar-based expenses. However, this principle is applied to the exact opposite, with international nomads calculating their local peso-based expenses, taking advantage of a highly favorable Mexican interest rate against an unfavorable home-country interest rate.

What else is there to consider? Look at your fixed expenses in Mexico for the next six months: rent food, and utilities. It may be worth it to place those funds in a Mexican savings account and remove what you need each month, earning a nice profit on the rest. As long as there is no significant change in the peso exchange rate in those six months, you will have won big time on your hedge.


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