Housing Slump, Crackdown Cut Flows, Hurt Mexican Peso

Valerie Rota and Alexander Ragir, Bloomberg, May 30, 2007

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The U.S. housing slump is squeezing Mexican migrant workers from Los Angeles to New York, where permits for new home construction are down 20 percent this year, according to the Census Bureau. That’s reducing the pace of money transfers, the second-biggest source of dollars in Mexico after oil exports, and turning the peso into a laggard among Latin American currencies.

Remittances rose 3.4 percent in the first quarter, the slowest growth in eight years. The peso has strengthened 0.1 percent this year to 10.8137 per dollar, the second-worst performance among the most-traded currencies in the region.

Cross-border transfers, which totaled $23 billion last year, also have been hurt by President George W. Bush’s crackdown on illegal immigrants. Bush increased security along the border and stepped up raids on factories hiring undocumented workers to help win congressional support for a bill that would give illegal immigrants a chance for permanent residency.

The number of people caught trying to enter the U.S. illegally from Mexico dropped almost one-third in the first quarter to 265,000, according to U.S. Border Patrol data.

Decline Predicted

The crackdown “certainly has an impact,” said Pia Orrenius, an economist who tracks immigration and remittances at the Federal Reserve Bank of Dallas. “It raises the cost of coming over.”

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Morgan Stanley and Dresdner Kleinwort predict the Mexican peso will fall for a second straight year because of the slowdown in money transfers, a drop in oil production and weakening demand for the country’s exports. New York-based Morgan Stanley forecasts a 5.1 percent drop to 11.4 pesos per dollar by year-end. Dresdner, the investment banking unit of Munich-based Allianz SE, predicts it will slide to 11.19. The peso fell 1.7 percent in 2006.

Leading Indicator

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The decline in illegal immigrants mirrors the U.S. housing market. Residential construction in the U.S. fell by 17 percent in the first quarter, according to the Commerce Department. The construction industry is the biggest source of work for Mexicans in the U.S., accounting for about 20 percent of jobs, data from Mexico’s central bank shows.

The pace of money transfers has moved in step with the U.S. construction industry since the late 1990s, said Dawn McLaren, a research economist at Arizona State University in Tempe. The correlation between the two has become so strong that she uses border apprehensions as a “leading indicator” for the U.S. housing market.

McLaren said she expects transfers to slow “at a more visible rate than we have previously seen.”

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