The peso begins the session with a depreciation of 0.67% or 14.1 cents, trading around 21.26 pesos per dollar, with the exchange rate touching a minimum of 21.0874 and a maximum of 21.4181 units of weight per dollar, a level not seen since 4 November 2020.

For a few moments, the Mexican peso was the most depreciated currency.

The depreciation of the peso is due to 3 factors:

First factor

In the United States, the monthly employment report showed that during February 379 thousand job positions were created, well above the 200 thousand expected by the market, showing an acceleration in the recovery of the labor market, driven by the relaxation in the measures of confinement and for the progress in the vaccination campaign.

Monthly job creation is the highest since November 2020.

The unemployment rate decreased slightly to 6.2% from the 6.3% rate observed in January.

However, if the underemployed people are taken into account, the rate rises to 11.1 percent.

Second factor

From the overnight, the exchange rate reached levels above 21.25 pesos per dollar, in the face of a strengthening of the dollar after the president of the Fed, Jerome Powell, acknowledged that inflationary pressures could be observed this year, so the market continues speculating on the possibility of the Fed taking a tighter monetary stance if inflation rises more strongly than expected.

Third factor

A greater perception of risk about Mexico, after the Senate approved the reform of the Electricity Industry Law last week, deteriorating the business environment in the country and creating conditions for a slow recovery of investment. In the foreign exchange market, the Mexican peso remains among the most depreciated currencies of the week.

US market

It should be noted that the first two points are associated with the expectation of an accelerated economic recovery in the United States and therefore the probability that the Fed will abandon its highly accommodative stance earlier than expected.

This morning, the yield rate on the 10-year Treasury bonds shows an increase of 4.4 basis points, reaching 1.61%, accumulating a weekly increase of 20.3 basis points, accumulating an increase of 54 basis points in the last five weeks.

The oil

In the commodities market, the WTI advances 2.26% and trading at 65.27 dollars per barrel, touching a maximum of 65.57 dollars per barrel, the highest level since January 8, 2020.

It should be remembered that yesterday OPEC and allies agreed to keep the cuts to oil production almost unchanged, while the market speculated an increase in production of between 1 and 1.5 million barrels per day.

The price of oil was not affected by the publication of the employment data in the United States.

Foreign trade and the peso

On the other hand, the trade balance for January in the United States was also published, which showed a deficit of 68.2 billion dollars (million dollars), increasing at a monthly rate of 1.9 percent.

In the interior, exports increased 1.0% and imports 1.2 percent.

It is worth mentioning that imports (260 million dollars) registered a maximum not seen since August 2019.

In January 2021, the top five trading partners of the United States were: China (15.6%), Mexico (14.6%), Canada (13.8%), Japan (4.9%) and Germany (4.6%).

Mexican market

In December, the Monthly Indicator of Private Consumption in the Internal Market registered a monthly decline of 0.51%, the first after six months of recovery. At an annual rate, private consumption fell 6.50% during the month, adding thirteen consecutive months of setbacks.

In the month, consumption was affected by two factors: 1) a challenging comparison base, since in November a monthly growth of 2.60% was observed due to the discounts of the “Good End” and 2) the deterioration of the epidemiological conditions in some areas of the country, especially in key states such as Mexico City and the State of Mexico, which caused closure and operating restrictions in shopping centers.

During 2020, private consumption registered a historical annual contraction during the months of confinement (April and May) of 22.73% and 24.07%, respectively.

Because the trajectory of the pandemic was not entirely favorable throughout 2020, restrictions and consumer caution were maintained, limiting the rebound with the reopening and the pace of recovery in the following months.

With this, consumption registered an average annual drop of 11.09% in 2020, being the largest drop since the series began in 1994.

In December, private consumption was affected by the monthly decline in the consumption of national goods and services of 0.26% (-7.37% annually), with a fall in the consumption of goods of 0.51% compared to November.

On the other hand, the consumption of national services registered a monthly advance of 0.64%, despite the adverse conditions.

Imports

For its part, the consumption of imported goods advanced 0.32% monthly, after the surprising increase of 20.57% in November.

With this, the consumption of imported goods presented an annual growth of 1.08%, the first after 10 months of falls.

In January, the consumption of imported goods could continue to advance, since, according to the January Trade Balance, imports of consumer goods increased at a monthly rate of 1.07 percent.

It is estimated that, in 2021, Mexico’s private consumption will have a rebound effect with an average annual growth rate of 4.7 percent.

Capital expenditures and the peso

During December 2020, gross fixed investment decreased 2.1% compared to the previous month, according to seasonally adjusted figures published by INEGI, the first monthly drop since September.

With this, investment accumulated a fall of 18.2% during 2020, the largest fall for a year since the 1995 crisis, when gross fixed investment fell 35.8% according to this same indicator.

Compared to December 2019, the investment was 12.9% lower, which now adds up to 23 consecutive months of negative annual rates, being the maximum period on record with falls.

Although investment fell 30.1% in April 2020 (compared to the previous month) with the beginning of the economic crisis of the pandemic in Mexico, the index already showed 14 consecutive months of annual contractions.

In 2019, before any effect of the pandemic had on the global economy, investment fell 4.6% in the year.

The main cause of the fall in investment in Mexico, in addition to the pandemic, has been the deterioration in the business climate in the country, which has become unfavorable for the private sector since the second half of 2018.

In the most recent survey of the expectations of specialists carried out by Banco de México, only 9% considered that now is a good time to make investments in the country and the percentage is not very different from that observed in the surveys carried out before the pandemic.

Construction

Within the indicator, it is observed that the greatest deterioration is in investment in construction, which fell at a monthly rate of 2.5% during December to be 14.2% below the level of twelve months ago.

The two types of investment in construction, residential and non-residential, fell during December, at monthly rates of 6.0% and 1.1%, respectively.

In annual terms, the most affected is non-residential construction, which in December showed an annual contraction of 18.8%, while residential construction contracted 9.5 percent.

In all of 2020, investment in construction fell 17.4 percent.

Regarding investment in machinery and equipment, it accumulated a 19.3% drop in 2020 after falling to a monthly rate of 1.4% in December (-11.5% annually).

The most affected was investment in machinery and equipment of national origin (-15.4% annually in December), while investment in imported machinery and equipment contracted (-8.5% annually in December).

Electrical reform

Investment levels are very low. The total index shows that the investment level in December 2020 is similar to 2009 levels, while investment in construction and machinery and equipment are at 2003 and 2011 levels, respectively.

Although this is mainly due to the impact of the pandemic, conditions in Mexico are not appropriate for investment to recover to pre-pandemic levels, which were already showing annual contractions.

Reforms such as the one approved this week to the Electricity Industry Law continue to raise doubts regarding trust in the country’s institutions and cause further damage to the business climate.

Likewise, the political uncertainty before the election day of federal legislators and governors that will take place in June of this year also introduces uncertainty to the economic environment.

Automotive section

The administrative registry of the automotive industry corresponding to February, confirmed the total sale to the public of light vehicles of 82,323 units, being the lowest level for the same month since 2014.

For its part, car production stood at 238,868 units, the lowest level for the same month since 2011.

With respect to February 2020, a 28.85% drop in car production was observed, being the second annual decline in a row and the largest since June 2020. In monthly terms, a contraction of 14.30 percent was recorded.

During February, automotive production was affected by three main factors: 1) the limited supply of gas, given the low temperatures in Texas and in the north of the country, which caused the temporary closure of various automotive plants, 2) the restrictions by Covid19 that remained in some states, avoiding the operation at maximum capacity in the industry and 3) the global shortage of electronic semiconductors.

It is worth mentioning that General Motors informed that its plant in San Luis Potosí will remain in technical stoppage until the end of March, due to the shortage of semiconductors.

Sales abroad and the peso

On the other hand, automotive exports registered a total of 213,987 vehicles, a level not seen in the same month since February 2014.

At an annual rate, they showed a drop of 21.80%, being the second consecutive annual decline and the highest since June 2020. With respect to the previous month, a contraction of 4.27 percent was observed.

In February, automotive exports were affected by blockades by normalistas in accessing the Lázaro Cárdenas port in Michoacán and by the Yaqui community on highways in southern Sonora.

The Confederation of Industrial Chambers of the United Mexican States (CONCAMIN) indicated that these blockades have affected the country’s productive chains and exports, since the northeast routes are of great importance for the export of automotive, electronic and agricultural.

Also, the shortage of semiconductor chips has caused disruptions in supply chains.

Going forward, it is expected that the weakness in domestic demand will continue and that this will be reflected in the levels of car sales in the country.

Pandemic

Likewise, it is not ruled out that the agencies will be affected again by the reinforcement of mobility restrictions, since the Easter holiday period could cause a new rebound in coronavirus cases in Mexico.

In the case of automotive production and exports, strength is expected in the sector during the first half of the year due to the demand from the United States for cars and components.

During February, the ISM manufacturing index in the United States increased by 2.1 units, reaching 60.8 points, remaining in the expansion zone for the ninth consecutive month.

In the interior, new orders increased by 3.7 units, reaching 64.8 points, a positive sign for Mexican exports.

However, the performance of the automotive industry will continue to be limited by the global shortage of semiconductors, since the Mexican Association of the Automotive Industry (AMIA) and the National Auto Parts Industry (INA) forecast that the shortage will continue until May or June.

During the session, the exchange rate is expected to trade between 21.20 and 21.50 pesos per dollar.

The euro starts the session with a depreciation of 0.55%, trading at 1.1903 dollars per euro, while the pound loses 0.70% and is trading at 1.3798 dollars per pound.

Money market and debt

In the United States, the yield on 10-year Treasury bonds increases by 4.8 basis point, to 1.61%, while in Mexico the yield on 10-year M bonds increases by 1.0 basis point, at a rate of 6.265 percent .

Derivatives market and the peso

To hedge against a depreciation of the peso beyond 22 units of peso per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.43% and represents the right but not the obligation to buy dollars at the aforementioned level.

On the other hand, the interbank forward for sale is at 21.3020 at 1 month, 21.6564 at 6 months and 22.0870 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE