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In America, as the USD appreciates, some companies within certain industries are affected negatively to the point their stock prices fall.
While still others are affected oppositely, their stocks go up right along with the dollar appreciation!
This correlation can be deduced as a dance between a company's market beta and its forex beta, or its propensity to change relative to the Standard and Poors 500 Index, or SPX and the Dow Jones FXCM Dollar Exchange Index, or US DOLLAR respectively.
For example, tobacco companies grow and manufacture their product here in the United States and then sell a great share of their product internationally where the demand for tobacco products has not been so tamped down by anti-smoking rhetoric.
Because tobacco processing and sales is such an old, stodgy industry ... The stock of companies engaged in the manufacture of cigarettes, for example, move at a more stable rate than the Standard and Poors 500 Index.
As a consequence, their market betas have been traditionally less than one ( β < 1.0 )
However, because of their international sales, when repatriating their efforts ...
The tobacco companies must convert from the local currency of sale, back into USD.
And, when the American dollar strengthens, most other currencies weaken to various degrees thus clipping the expected take when converting back to USD.
On the other hand, the Forex beta of a domestic American tobacco company may be negative, thus denoting an adverse change in stock price whenever the American dollar appreciates.
Why is this so?
Because the less number of expected American dollars (USD) received upon conversion of the underlying currency will depress the operating earnings of an international division extracting sales from a foreign country upon translation.
This form of exposure to the currency markets is called Translation Exposure and represents the phenomenon when translating earnings from one foreign subsidiary back into American dollars (USD), the risk of receiving less USD than expected is real.
The Donald and the Ford
Why then did Ford stop plans to open up a new $1.6 billion (USD), or ₱35.2 billion (MXN) assembly plant in Mexico ...?
Was it because Trump said so?
The short answer is "No!" ...
But, Trump's rhetoric started the "sell-a-thon" in Mexican pesos which led to Ford's decision to defer until a later point in time when the currency has settled.
Enter the Peso MXN
Mexico is a relatively small international market yet the people of Mexico purchase approximately nine-percent ( 9% ) of all U.S. exports of goods and services, one-half ( 1/2 ) of which originate in Texas.
Trump didn't tell you all Texicans that he was gonna mess with your honey pot, too?
Well, he is ... and, already has!
So, the $64 dollar question is "Can the prices of those goods and services be raised in MXN to compensate for the increase in value of the USD?"
If you as an American exporter to Mexico were expecting to receive $100 USD for your goods or services ... But, instead are now receiving back $60 - $65 USD because of the MXN currency decline ( for the same amount of pesos bargained ), can you then raise your prices in MXN to compensate for your loss in USD?
Elastic vs Inelastic Demand
The good news is that the demand for unique products tends to be highly inelastic, or price insensitive.
Thus, a company that produces a unique product should be able to raise its prices in terms of the now declining MXN to compensate for the change in currency value experienced by a now stronger "greenback", or USD.
This act, however, may invite competitors to enter the market long term, but over the short term, losses can be trimmed without too much risk to the volume of units moved ... By simply increasing the price of your goods denominated in Mexican pesos.
Woe unto the Mexican consumer, however, if you do this because now the Mexican consumer is experiencing price inflation.
To compensate, the Mexican consumer will have to demand greater wages to maintain their standard of living.This is a classic "price - wage" inflation cycle and is being practiced by the new Trump administration even prior to his inauguration.
If your product is not inelastic, but rather elastic ... That is to say ... Volumes of units tend to be very sensitive to the price you charge, up or down ... as in eggs and chickens ...
Then, you as an American producer selling your product in Mexico will not be able to raise the price of your product in MXN without dually causing thoughts of disintermediation within the minds of the consumers of your product.
Regardless of whether or not those consumers are Mexican, or Mexican - American ... You will also be inviting the Mexican competition to eat your market share while the currency advantage is theirs!
The Market For Autos
The market for automobiles is highly refractive causing price to be quite the sensitive item when consumers consider the purchase of "like" vehicles.
One way a company can hedge against currency fluctuations outside of its native country of domicile is to hedge operationally.
In the past, under the effects of the NAFTA paradigm, relocating (replacing) employees and manufacturing and research sites may have been a practical and cost-effective way of dealing with exchange-rate exposure long term.
Today, however, another variable exists.
When the President-elect of the United States is threatening to slap a 1928 style 25% Tariff tax on ANY automobile manufactured in Mexico that attempts to be sold back into the American market going forward, the nature of fiat money as it is will move the currency in that direction.
While costs associated with the assembly of a product may be denominated in the falling peso, a great lion's share of the parts do come from manufacturing facilities in the United States and elsewhere besides Mexico.
Hence, the equation becomes one of the present value of the initial investment and the components priced in MXN less the present value of the now Tariff taxed revenues received in America along with the components priced in USD.
There is also a possibility, however remote, that the underlying property and the finished factory may actually appreciate in terms of the MXN when the dollar strenthens, thus mitigating the effects of any exchange currency decline.
The idea is that ever cheaper pesos will invite buyers who will then bid up the price of factories and other forms of operational real estate to counter the decline of the MXN on the FOREX exchange.
However, given the uncertainty of where the Mexican peso will land "this time" based on where it landed in 1993 - 1994 during that two-week round of market restructuring at the dawn of NAFTA ( -37% ), Ford simply decided to delay action until the currency has become settled.
Indirectly, yes ...In these times of "fiat" money, Trump and the GOP through their rhetoric may be to blame for this pre-mature move downward in the MXN.
For sure, consumers in America will now have less choice going forward favoring only foreign and domestic factories that have set up assembly in America.
Unless, of course, American consumers can continue to cross the southern border without restriction to take advantage of the now lower peso.
As long as the new administration does not add an additional duty upon American consumers when attempting to repatriate themselves and their new found goods back into the United States, the decline in the MXN may have a silver lining.
Dental work, for example, a service with components priced in pesos should be lower now in Algodones, MX.
Drive about 5 miles east of the Arizona - California border on Interstate 8 out of Yuma,
Americans crossing the border to improve their smiles ... Though hassled by the US Border Patrol on the way back in, currently have to declare "No Duty"" on simple purchases of antibiotics and other pharmaceuticals prescribed by Mexican dentists and purchased from reputable Mexican pharmacies across the border while getting their dental work performed.
Nor does a duty currently exist on the new crowns placed on American teeth by Mexican dentists.
But, other products flowing back into America through more direct routes, such as automobiles manufactured in Mexico, may not be so lucky.
The act of setting up preventive Tariffs on products entering the United States from abroad can either firm prices domestically ... Or, the more likely scenario ... The slapping of Tariffs on imported goods will allow American manufacturers to raise their prices domestically.
The economy of Mexico may not falter from ONE less company requesting the purchase of Mexican pesos to fund their property acquisitions in Mexico pulls out.
But, a dearth of foreign direct investment into Mexico will put a damper on the prospects for further Mexican economic prosperity.
Still, the ongoing costs that can be denominated in cheaper pesos i.e.) the final assembly of a product destined for the American market chock full of Mexican made components may get a boost from the lower peso when priced competitively in the United States sans Tariff.
Selling Breeds More Selling Until Exhaustion
From the old trading range ( exchange ratio ) of ten to fifteen pesos per dollar ( 10 - 15:1 ) after the financial crash of #2008 to the new year #2017 "distressed" twenty-two to one ( 22:1 ) exchange ratio stemming from the general election of the New Yorker Donald Trump in November of #2016, this is no time to try to "bottom fish" the MXN.
Alternatively, Ford could try to borrow money from Mexican banks denominated in Mexican pesos at the going borrowing rate to hedge any property - factory investments by repaying the debt with every cheaper pesos.
But, the threat of taxing sales imported to the American market via a repugnant 25% Tariff in USD ...
Would place a greater percentage of projected vehicle ownership in the hands of Mexican consumers who are already experiencing the new paradigm of the declining peso.
Not a very comforting outlook to the central planners at Ford when contemplating American consumer purchases of their Mexican produced vehicles.
Thus, in order to justify the construction of another plant in Mexico today without projected sales to American consumers, a more local flavor to the decision by Ford to discard rather than venture further prevails.
Factoring in the effect of the "price - wage" inflation pull upon the Mexican consumer now that any good or service imported from America costs an additional thirty-two percent (32%) in market adjusted Mexican pesos ...
Such as an American made Ford Mustang ...
Will tend to restrict purchases, rather than ameliorate trade ie.) make something bad or unsatisfactory better.
Meanwhile ... On the other side, "El otra lado" ... In America ... The effect of "cost deflation" upon the American manufacturer that sources Mexican components imported from Mexico ( sans the proposed 25% Tariff tax ) will allow fatter profits to flow to the American manufacturer currently without any boost in real price needed.
Is this the way President Trump plans to extract his alternative tax of $10 billion USD to build his wall along the Mexican - American southern border?
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