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Currency fluctuation is a key factor in international trade that can lead to major surprises in your costs if not managed properly. For Mexican businesses, variations between the Mexican peso and the US dollar (or any other currency) have a direct impact on the profitability of every transaction.
This means that a devaluation or appreciation of the peso can make a huge difference between making a profit or a loss.
Below, we explain in detail how this phenomenon affects your foreign trade operations.
Impact on Imports
When a Mexican company imports products, it generally pays in dollars or another foreign currency. The relationship is as follows:
If the peso devalues (the dollar goes up)…
The cost of your imports increases. You need more Mexican pesos to buy the same amount of dollars, which makes the goods you’re acquiring more expensive. This can reduce your profit margin or, in the worst-case scenario, make your final product less competitive in the local market.
If the peso appreciates (the dollar goes down)…
The cost of your imports decreases. This is a favorable scenario for importers, as foreign goods become cheaper in terms of pesos, allowing you to improve your profit margins or even lower prices to gain more market share.
Impact on Exports
For companies that sell their products abroad, the situation is the opposite, but just as sensitive to the exchange rate.
If the peso devalues (the dollar goes up)…
This is a favorable scenario for exporters. When they receive payments in dollars, their revenue translates into a greater amount of Mexican pesos. Your products become more competitive in the international market, which can boost sales and increase your profits.
If the peso appreciates (the dollar goes down)…
This scenario is unfavorable for exporters. Although you receive the same amount in dollars, when you convert them to pesos, you get less money. This can reduce your competitiveness and affect your income, as your product is now more expensive for the foreign buyer.
How to Mitigate Exchange Rate Risks in Imports and Exports
No one can control currency fluctuations, but you can take steps to mitigate their impact on your finances. Here are some strategies:
- Forward Contracts (Hedging): You can agree on a fixed exchange rate for a future date. This gives you certainty about the cost of an import or the value of an export, regardless of what happens in the market.
- Invoicing in Different Currencies: If possible, negotiate with your business partners to invoice in a less volatile currency or one with a more stable relationship to the peso.
- Market Diversification: Expand your business to different countries with different currencies. This way, if one currency becomes unstable, the impact on your business won’t be as severe.
- Professional Advice: Work with an expert logistics partner to help you plan your operations.
At Remar International, we not only manage logistics and customs, but we also advise you on the best time to conduct your operations, considering the global economic factors that impact your business.
With over 26 years of experience in the trading company sector, we’ve got your back!
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