challenges. one is maintaining credibility in light of perceived low and decreasing policy effectiveness. not only has expansionary monetary policy faced difficulties attaining the intended objectives, including support for growth, but lately, such as in japan and the euro zone, even their financial effects, in terms of exchange rates and other asset price movements, seem to be the opposite of those expected. the other challenge is to deal with the consequences of asset price distortions as a result of monetary accommodation and consequent financial stability risks. for this and other reasons, future amplification of uncertainty and volatility cannot be ruled out. to date, heightened risk aversion has not greatly affected mexico ’ s key financial quantities, such as non ‐ resident holdings of peso ‐ denominated government securities. these foreign portfolio investments are among the highest in emerging markets, a fact which could be interpreted as a sign both of strength and possible vulnerability, for instance, if a sudden change occurs in market sentiment towards emerging markets or mexico. these holdings have been relatively stable in absolute terms during the last few years, largely reflecting lower short ‐ term asset positions, namely zero coupon cetes, while those of long ‐ term m bonds have increased persistently. this behavior may suggest that investors ’ positive long view on mexico remains firm. caution is appropriate, however, as international conditions can always change. the adverse international environment has exerted a clear effect on mexico ’ s asset prices. in particular, market interest rates, especially those of medium duration, have been rising, along with risk perception. consistently, spreads against the united states have been widening, as interest rates in that country have either fallen or stayed flat. more notably, the value of the dollar in peso terms has been trending upward sharply, along with its value in terms of a basket of emerging ‐ market currencies. however, so far in 2016, the mexican peso has decoupled from other currencies, with a further substantial weakening, while the others, on average, have appreciated. the obvious question is why the mexican peso has been hurt more severely. 4 several factors could be behind peso underperformance, in particular, three possibly interrelated causes. one is rather mechanical and refers to the fact that the mexican peso is a highly liquid currency in international markets. this characteristic leads investors to see the peso as an attractive vehicle for hedging against an ample set of risks. a second, deeper reason may

slower sector in mexico. a significant driver of weakness in u. s. manufacturing can be found in foreign trade, in the context of a global tendency in recent years of smaller international flows of goods, extending to the united states. in particular, both u. s. manufacturing imports and exports have been shrinking, and statistical evidence suggests that reduced foreign trade is sapping vigor from the manufacturing sector in that nation. 2 a warning sign comes from forward ‐ looking indicators for u. s. manufacturing, such as those estimated as diffusion indexes based on surveys. the manufacturing pmi, see banco de mexico ( 2016 ). informe trimestral abril ‐ junio 2016, august, box 2, pp. 30 ‐ 33. calculated by the institute of supply management, recently touched contraction territory and since then has stayed close to it. against this backdrop, mexico ’ s annual gdp growth has been relatively stable during the last three years at around its long ‐ term average of 2. 3 percent, with a dip in the second quarter of 2016. this development has resulted from two opposing forces : expansion in services and a weaker industrial sector. weakness in industrial production reflects both domestic and external restrictions. on the one hand, mining has been dropping significantly, mainly due to a longstanding decline in oil extraction. this, in turn, reflects near depletion of the most profitable oil fields, as well as insufficient investment by the state ‐ run oil company, pemex, and poor results from exploration projects. on the other hand, slower manufacturing is linked to softening u. s. production, as suggested earlier. mirroring developments in the united states, mexican manufacturing exports, especially those directed to that country, are subdued at negative growth rates, largely explaining trends in manufacturing output. this has occurred in spite of substantial real peso depreciation vis ‐ a ‐ vis the u. s. dollar. although peso competitiveness has allowed mexican exports to gain some market share in the united states, this price effect has been more than offset by a negative effect associated with lower external demand for mexico ’ s goods. in contrast, services are still relatively robust, constituting the most significant engine of recent economic growth. however, expansion in the services sector has stalled lately, partly reflecting spillover from contracting foreign trade. for example, slower trends are present in both commerce and trucking, which are tightly linked to external trade. on the demand side, private consumption has continued to increase at relatively high