Curious Currency Spreads

Mexperience readers of old will know that we have always encouraged them to bring their foreign currency and exchange it in Mexico, as the deals on offer here provide much better value than exchanging currency over the counter in the USA, Canada and Europe.

Mexico City’s international airport has, forever it seems, been the country’s ‘bellwether’ market of over-the-counter (retail) foreign currency exchange.  When newspapers and the media here report on stories about ‘how much the peso is worth against the dollar’ they always quote the ‘airport’ rate.

The country’s principal airport keeps its clientele well-served with an abundant selection of foreign currency exchange houses actively competing in the open market for a range of paper currencies, and especially the US dollar.   They are located throughout the airport (land side) at Terminal One, although the largest cluster of booths is, quite sensibly, situated immediately in front of the international arrivals gate.

A wander down “exchange house row” at Mexico City’s airport this evening (including the traders beyond the international arrivals gate area) revealed some interesting market activity.

The rate boards typically show a ‘dollar buy’ rate (how many pesos the house will give you in exchange for a US dollar) and a ‘dollar sell’ rate (how many pesos the house will require you to hand over in exchange for a US dollar).  The difference between these two rates is the house’s margin, and is commonly known in the trade as the ‘spread’.

Today, the wholesale (interbank) peso/dollar rate closed at MX$13.008.

This evening, if you were selling dollars at the airport, the market rates on offer range from MX$12.50 to MX$12.90 depending on which exchange booth you choose to trade with.  If you were selling pesos to buy dollars this evening, the market rates at those same establishments range from MX$12.75 to MX$13.15.

These spreads are quite significant.  If you were selling US$500 at the best rate, you’d walk away with $6,450 pesos in your pocket.  If you traded at the worst rate, you’d have just $6,250; $200 pesos can go quite a long way in Mexico.

One might wonder why the house offering $12.50 for each dollar doesn’t compete more intently with the house less than ten yards away offering $12.90 or, conversely, why the house offering $12.90 doesn’t trim its offer rate and thus increase its margin (vis-à-vis, profit) on each transaction.

The market prices on offer at retail exchange houses are not necessarily placed to ‘compete’ with the rate on offer at an exchange house ‘next door’, but moreover are related with the currency positions held by these retail exchange houses.  If an exchange house has a shortage of dollars, it may increase the amount of pesos offered for each dollar across its network of exchange house branches, in a bid to attract greenbacks.   Alternately, if the exchange house has sufficient dollars, it may reduce the amount of pesos offered for each one and so quell the influx of that currency across its counters.

This fluid and dynamic market, which is reflected so well across Mexico’s retail currency exchange counters, makes it worthwhile investing a few minutes to gauge the local currency markets when you arrive in Mexico and want to get your hands on some local coinage.

The exchange houses at the capital’s airport are all within a three to four minute stroll of each other, and a swift glance at the boards will give you an excellent indication of the state of the current market.  Checking rates across a small handful of exchange houses, you could benefit from an additional US$5 worth of pesos for every US$100 you trade, simply by ‘spotting’ the exchange house that is currently in greater need of your foreign currency now – and willing to pay a market premium for buying it from you.

Connect to the Mexperience Money in Mexico guide for full details about Mexican currency, including tips and advice about foreign exchange.