What is likely to happen to the Peso exchange rate?

It's no secret that collecting revenues in one currency (say, US dollars or USD) and having most of your expenses in another currency (say, Mexican Pesos or MXN) exposes the budget to "currency exchange rate risk."

So long as the currency exchange rate doesn't change, then actual spending should track closely with budgeted spending.  But it if changes, the financial statements will show surplus or deficits, even though nothing in the underlying operation is different.

The Peso has been strengthening significantly of late.  This causes problems with our USD-based budget.

Mexican Currency Exchange Rates

Our 2023 Budget was developed when the Peso was at 20.28 MXN to 1 USD.  As of July 28, it was 16.75!    That is a 20.28 ÷ 16.75 ... or 21% difference!  Said another way, assuming the 16.75 exchange rate was experienced in all the months of this year, then our planned spending of $1.2 million USD would show up as $245k over budget!

Nothing changes in the underlying operation.  If the Peso stays at 20.28 to the dollar, we'd spend exactly $1.2m.  But if the Peso moves to 16.75, we'd report $1.45m in spending.  (And if the Peso moves to 23.0 to the dollar,  we report spending of $1.06m, a $140,000 surplus!)

How Volatile Is The Peso?

Can we expect it to go back to 20 to the dollar?  Or will it go to 15 to the dollar?  No one knows.

If you are one who believes in "reversion to the mean" ... that might mean a return to the 19-20 band ... or a move into the 13 range!  Here is a graph showing exchange rates over the past 20 years.

Buckle up.  Until this volatility calms down, we will be subject to significant budget impact (even though the underlying operations are the same.)

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