The U.S. and Mexico have a close economic relationship. Of our top 15 trading partners, who make up 75% of all of our foreign trade, Mexico is the largest, with a 15% share of that total. In 2019 that translated to the U.S. exporting $256 billion of products to Mexico, and importing $368 billion of products, for a total of $614 billion. With volumes like this, there continue to be opportunities for exporters to do business in Mexico.
The Mexican economy has shown some volatility recently. After growth in 2018 it contracted slightly in 2019, ending the year with a GDP of $1.2 trillion USD. The Mexican economy contracted again in Q1 and Q2 of 2020 as a result of the pandemic, though it showed signs of growth in Q3. The forecast going into 2021 continues to remain uncertain due to the pandemic, but some see the possibility of growth.
The pandemic is also contributing to greater volatility in the Mexican currency. This unpredictability can lead to a risk of eroding profits due to currency loss, making companies hesitant to invoice in anything other than U.S. dollars. But there are advantages to invoicing your buyers in Mexico in pesos, as well as strategies to mitigate the currency risks.
Advantages of Dual-Currency Invoicing
A global event like the COVID pandemic can lead to wild currency swings. But currencies around the world can fluctuate for many other reasons as well. Some of these include public debt, interest rates, inflation, trade deficits, political instability, and economic performance.
Even accounting for currency fluctuations, as an exporter in the U.S. who is considering exporting to Mexico, dual-currency invoicing your Mexican buyers can give you an advantage.
Dual-currency invoicing gives customers the option to pay in either U.S. dollars or in pesos, making it easier for your customers to do business with you. It will help you stand out from your U.S.-based competitors who are only invoicing in dollars.
It’s also likely your foreign competitors selling product in Mexico are already dual-currency invoicing, as it’s a common practice in Europe. When you do the same, you’ll put yourself on even footing with them. It can help you increase your sales by making it easier for buyers to do business with you and purchase your product.
Protect Yourself Against Currency Volatility
As we mentioned earlier, currency volatility is a big consideration if you decide to dual-currency invoice. You must be able to manage the potential for tremendous currency volatility, so your profit isn’t impacted.
Fortunately, you can manage this risk by using simple tools such as forward contracts to lock in currency prices today for future delivery. Forward contracts let you lock in at a price to either take advantage of current conditions, or to hedge against unfavorable currency fluctuations.
As an example: If you’re expecting to receive pesos, you can lock in a price today and you’ll get dollars at that price 30 or 60 days from now, depending on when you lock it in. Regardless of what happens to the currency in the interim, you’re protected from losing profits due to a drop in the value of the peso.
No Foreign Bank Account Needed
It’s not necessary to have a foreign bank account to issue dual-currency invoices. You can continue to rely on your existing banking network, and work with a U.S. company such as TEMPUS that specializes in processing transactions in foreign currencies.
That’s what TEMPUS does: leverage our expertise to help clients understand the markets and devise appropriate strategies. We have dedicated specialists who help companies all around the country. The Bloomberg FX Forecast Accuracy Rankings for 2020’s Q4 named Monex the top currency forecaster for the Mexican Peso. Our forecast was within 0.3% despite the USD/MXN moving more than 10% within the quarter.
With our help, exporters doing business in Mexico can increase sales and minimize risk while invoicing in pesos.
