In discussing the cost of living for expats here in Mexico, I have at times mentioned the exchange rate. I’ve never spent much time discussing it, because I have always felt it’s an environmental condition, or as the saying goes, “it is what it is.” Over the six years we have been expats, I have noticed many expats who are fixated on the exchange rate. It obviously does have some implications, but perhaps not for the reasons many expats think.
Here’s a handy chart showing how the Peso had varied with the dollar over the period we have been visiting/living in Mexico. We bought our first home here in 2012 (just off-chart), but the Peso had been steady at around 12 MXP – 1 USD for several years. We finally retired and moved here in February, 2017, and the Peso had depreciated to 18 MXP to the dollar.
Now we had done our research and knew that the cost of living in Mexico was already less expensive than in the United States. But by the time we arrived to live as expats, Mexico was on a half-price sale. And with a few perturbations (more on those later), it stayed there until the pandemic hit.
Those were very good days to be an expat, especially if your income, pension, or investments were denominated in dollars. The only exception to the rule was for American products. For example, what if you wanted to buy a jar of Skippy’s Extra-Chunk Peanut Butter, labelled in English and imported from el Norte? If the domestic price there was $8.00 USD, you would incur a mark-up and tax leading to $10.00 USD total price, but you were buying it in Mexico, which meant the price also had to be converted to Pesos. At a 12:1 rate, your cost would have been $120 MXP, but at an 18:1 rate, your price was now $180 MXP! Basically, the stronger your dollar was, the more expensive any US products you wanted. But in general, buying local products and services, expats with dollars benefited from a strong dollar.
What causes those spikes and drops in the chart? It’s a complex process, which leads most investment advisors to caution against currency speculation: there are just too many variables which are entirely out of one’s control. For example, if a country undergoes political disruption, that causes investors to pull money out of that country, weakening the currency. The same goes for if a national leader starts doing things like nationalizing industries, or decides to devalue a currency overnight to fight rampant inflation. While there are warning signs of such events, they are hard to read, and can be disastrous to currency traders or investors.
There are also some pretty consistent factors affecting the relative strength of a currency. In addition to monetary and political stability, there is remittance flows, foreign direct investment, the overall state of the nation’s economy, and foreign demand. These combine in the case of the US dollar to keep it the world’s (unofficial but real) reserve currency. Everybody wants dollars when exchanging goods and services, because they know the value of the dollar is strong, stable and universally respected. That’s also why that factor is unlikely to change in the near future, and certainly not quickly.
In the case of Mexico, remittances from Mexican migrants (legal and otherwise) in the US are at a record high. Jobs are plentiful, pay is increasing, and they are sending more money back to their families than ever before. Large chunks of foreign direct investment (FDI) are moving to Mexico as part of the move towards friend-shoring, that is, moving manufacturing to closer, more friendly countries rather than places like China. Mexico’s inflation rate is slightly less than in the US, and Mexican banks are offering high interest rates on savings/investments. Which makes the Peso stronger against the dollar.
Those with dollar reserves notice they don’t go as far, but they don’t notice that US products are a little cheaper, too. It all depends on what you spend your money on. Some expats live on fixed incomes and can really feel 10-20% price swings. Others try to buy extra Pesos (by exchanging at an ATM) when the rate is favorable. Nothing wrong with that, as long as you have a secure place to store them and you take into account the fees you might incur with the bank. The thing is, even if you’re exchanging $500 USD at a time, the difference remains small. At 20:1, you received 10,000 MXP; at 16:1 you get 8000 MXP. Most people are exchanging far less.
Some expats try to get around the currency changes by having their income/pension/social security deposited directly into Mexican accounts as Pesos. Of course, the bank is either charging a fee or determining your exchange rate, and they’re making money either (or both) ways. Not to mention for American expats, there is the issue of FATCA and FBAR compliance if you have foreign accounts. Never heard of it? You should!
FATCA is the Foreign Account Tax Compliance Act. Essentially, it requires banks to submit data on any foreign accounts held by Americans. It’s why some American banks discharge expat accounts or refuse to permit expats to open accounts, because the banks don’t want the headache of the reporting requirement to the IRS. FATCA also requires expats holding more than $50,000 USD in foreign accounts to file a report to the IRS and pay taxes on those accounts.
FBAR is the Report on Foreign Bank and Financial Accounts, a form American expats are required to file annually (with their taxes) but this report goes to the Financial Crimes Enforcement Network (FinCEN), not the IRS. This report is mandatory if you have a total of $10,000 USD in any number of foreign accounts (bank, mutual fund, bonds, etc.) at any time during the year. Since this is a tool to combat financial crimes (not for tax purposes), the US regards failure to file as a very serious offense (likewise, conscious attempts to avoid filing, like manipulating transactions to stay below the $10,000 USD limit). The US also does not recognize ignorance as an excuse for failing to file the FBAR, although there are ways to avoid criminal penalties through voluntary make-up reporting. Needless to say, all this is a lot of work to go through.
Post-pandemic Peso-Dollar exchange rates settled in around 20:1, which was really great as it was easy to mentally calculate (drop one digit from the Peso price and divide by 2= Dollar price). Lately the Peso has strengthened to under 17:1 to the Dollar. To me the biggest change is mental (dividing by 17? Fuggedabouit!). Mexico is still inexpensive at this exchange rate. So I have to make my Skippy Extra-Chunk last a little longer? No problema!