The peso closed the week with a depreciation of 1.49% or 35 cents, trading around 24.00 pesos per dollar, hitting a maximum of 24.12 pesos. The depreciation of the peso occurred alongside a general strengthening of the US dollar.

The peso and its environment

During the week, the dollar weighted index registered an increase of 0.88%, which was due to the following factors:

First factor

Trade tensions between China and the United States have risen. Although there was already communication between the negotiators of the phase one trade agreement and a commitment by China to comply with the increase in imports from the United States, Donald Trump continued his criticism of the Chinese government in the face of the coronavirus crisis, awarding responsibility.

On the other hand, at the end of the week, the United States Department of Commerce restricted the use of US technology and software to manufacture its semiconductors outside the country.

According to the official statement, the plan aims to protect national security. Going forward, China is likely to announce retaliatory measures, which could elevate risk perception in global financial markets.

Second factor

Optimism related to an accelerated economic recovery eased, particularly in the United States. In the middle of the week, Fed President Jerome Powell gave a conference where he spoke about his growth forecasts and about the future of the interest rate.

Powell noted that there are broad risks to economic activity, so there may not be an accelerated recovery in the second half of the year.

He also opposed the strategy of cutting the interest rate to negative levels, something that had been speculated in previous days, suggesting instead that additional expansionary fiscal policies be applied.

The behavior of the dollar suggests that a part of the market had adjusted to the possibility of negative interest rates.

Towards the end of the week, it was published in the United States that retail sales declined during April at an annual rate of 21.6%, being the biggest drop on record, while industrial production contracted at an annual rate of 15%, the largest since the series began in 1919.

Third factor

In the United States, the number of deaths from coronavirus has exceeded 80,000, and it is likely that outbreaks will be seen again due to the reopening measures that have been implemented in the last two weeks.

For now, there is uncertainty as to whether the reopening will be successful and will allow the economic recovery to start in the summer.

The peso and other currencies

It should be noted that the weekly depreciation of the peso was not profound, since a plan to restart economic opening was announced in Mexico, which moderated the depreciation of the peso.

Likewise, after the decision to cut the interest rate by 50 basis points to 5.5%, the market interpreted the statement as cautious, due to the uncertain outlook for inflation. This reduces the likelihood that the Governing Board will cut the benchmark rate rapidly.

During the week, the exchange rate touched a minimum of 23.5514 pesos and a maximum of 24.4107 pesos. The euro-peso reached a minimum of 25.4228 and a maximum of 26.4834 pesos per euro in the interbank prices for sale. For its part, the euro touched a minimum of 1.0775 and a maximum of 1.0896 dollars per euro.

At closing, interbank quotes for sale were 24,0040 pesos per dollar, $ 1.2115 per pound and $ 1.0815 per euro.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE