The peso begins the session with a depreciation of 0.57% or 13.8 cents, trading around 24.33 pesos per dollar, given a general weakening of most currencies against the dollar, as a result of a greater perception of risk in global financial markets , particularly in the capital market.

The peso and its descent

The factors that contribute to this negative perception are the following:

First factor

Yesterday morning, Fed President Jerome Powell ruled out the possibility of negative interest rates being implemented, which tends to strengthen the US dollar.

Powell’s participation also generated nervousness because the economic outlook is negative. According to him, there are significant risks to economic growth that can cause a protracted recession and not a «V» type, as capital market participants have been speculating since April.

Second factor

According to a US media outlet, Donald Trump said he was «observing» Chinese companies that operate in the US capital market, but do not follow the country’s accounting rules.

There has been no further clarity on these comments, but there is a risk that Trump will announce measures that could be interpreted as direct actions against the Chinese economy.

Just on Monday night, the Trump administration asked the Federal Retirement Savings Investment Board, which is responsible for managing retirement funds for federal employees, to avoid investing in funds that include holdings in Chinese companies.

Third factor

In the United States, the initial requests for unemployment support were published last week, which stood at 2,981 million, above the 2.5 million expected by the market.

Although this is the lowest level in the last eight weeks, it is still more than 10 times higher than the average in 2019 of 223 thousand requests per week.

Continuing applications for unemployment support, showing people who were eligible to receive the benefit and are currently receiving it, stood at 22.83 million people, representing 14.59% of the workforce.

Futures

Due to the increased perception of risk, the capital markets registered falls in Asia, with a loss of 1.74% of the Nikkei 225 in Japan and falls of 0.96% and 0.94% in the Shanghai and Shenzhen indices of China.

On the other hand, in Europe the main capital market indexes register falls of close to 3%, while in the United States the futures market points to a negative opening, with falls of around 1 percent.

In the session, the most relevant event for Mexico will be Banco de México’s monetary policy decision at 1:00 p.m., where a cut in the interest rate of 50 basis points to 5.50% is expected. Because the cut is widely expected, an exchange market reaction is unlikely to be observed.

During the session, an exchange rate is expected, trading between 23.50 and 24.50 pesos per dollar. The euro began the session with a depreciation of 0.34%, trading at $ 1.0781 per euro, while the pound fell 0.41%, to a price of $ 1.2182 per pound.

Money and debt market.

In the debt market, the yield on 10-year Treasury bonds in the United States decreased 4.4 basis points, at a rate of 0.61%, while the yield on 10-year M bonds in Mexico increased 4.8 basis points, at 6.16 percent.

The peso and the derivatives market

To cover a depreciation of the peso beyond 25.5 pesos per dollar, a call option, with an exercise date within 1 month has a premium of 1.71% and represents the right but not the obligation to buy dollars in the level mentioned above.

On the other hand, the interbank forward for sale is at 24.4053 at 1 month, 24.8907 at 6 months and 25.6170 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE