The peso starts the session with an appreciation of 0.89% or 18.3 cents, trading around 20.30 pesos per dollar, with the exchange rate touching a maximum of 20.5500 and a minimum of 20.2971 pesos, respecting the support of 20.30 pesos per dollar.

From a technical point of view, in the week the exchange rate has tried unsuccessfully to pierce, on two occasions, the support of 20.30 pesos after the announcement of the Fed’s monetary policy, which sends the signal of an increase in demand for dollars below that level.

If pierced in the short term, the exchange rate could extend the downward movement towards a level of 20.15 pesos per dollar, which was an important support in mid-February.

In the foreign exchange market, a mixed performance is observed, where the Mexican peso is the most appreciated currency, followed by the Turkish lira with 0.88%, the Brazilian real that advances 0.70% and the Russian ruble with 0.37 percent.

It should be noted that the advancing currencies are all from emerging economies and the appreciation of the peso is not associated with any particular event in Mexico.

The appreciation of this group of currencies occurs after, in the bond market, the yield rate of the 10-year Treasury bonds shows a decline of 1.4 basis points, standing at 1.69 percent.

Because the performance of the foreign exchange market is mixed, the dollar weighted index remains unchanged from yesterday’s close.

The peso

Despite the calm observed in the foreign exchange market this morning, there are risks that could generate episodes of volatility and particularly affect the Mexican peso.

First risk

A rebound in Covid19 cases is observed in some countries.

In Germany, the Covid19 cases registered a maximum not seen since January 21, when 28,489 new infections were reported in the last 24 hours.

The health minister indicated that they are observing a third wave of infections, so difficult weeks are expected as there is not a sufficient supply of vaccines.

In France, the authorities announced a new lockdown in Paris and other regions amid the rebound in Covid-19 cases.

The foregoing is also evidence that a significant rebound in cases could be observed in countries that have not implemented a comprehensive vaccination program, as is the case in most Latin American economies, including Mexico.

Second risk

Today is the expiration day of futures and options, so it is expected to see a significant increase in the volume of capital market operations.

Sessions like today are generally conducive to adjustments in investment portfolios, so important movements can also be observed in the bond market and foreign exchange market.

Third risk

The first high-level meeting between US and Chinese officials was held in the Joe Biden administration.

According to the media, the meeting that continues in Alaska has been full of accusations from both countries, marking the beginning of an unfriendly relationship with the new administration in the United States.

A Chinese foreign policy official accused the United States of abusing its military and financial position to obstruct international trade and incite other countries to oppose China.

For its part, the United States maintains a stance against unfair competition in China. This sends the signal that, at least in the medium term, the trade war between the two countries will continue and an escalation of tensions is not ruled out.

Fourth risk

Morena’s deputy, Alfredo Rivas, presented an initiative to reform the Amparo Law, with the purpose of rejecting suspensions when it comes to matters that benefit society and the nation.

This is the second reform initiative to the Amparo Law presented by the party during the week.

On Wednesday, the deputy Reyna Celeste, proposed to modify the Amparo Law to prevent it from being used to obstruct principles in matters of public services and the operation of productive state companies.

The initiatives come after a federal judge temporarily suspended the effects of the reform to the Electricity Industry Law. The above contributes to the environment of internal uncertainty.

Oil and peso

In the raw materials market, the prices of the main oil blends continue their downward trend for the sixth consecutive session due to an increase in nervousness around their demand.

This occurs despite vaccination efforts, as everything seems to indicate that the virus is spreading faster, which has led some regions of Europe to re-impose restriction measures.

Given this, the WTI starts the session trading at 59.14 dollars per barrel, which is equivalent to a contraction in its price of 1.43 percent.

In the last six sessions it accumulates a contraction in its price of 10.18% and in the week it contracts 9.54 percent.

Mexican market

Regarding economic indicators, INEGI published the Global Supply and Demand of Goods and Services for the fourth quarter of 2020, which showed an advance at a quarterly rate of 4.83%, being the second consecutive advance. From the aggregate demand perspective, consumption presented a quarterly growth of 5.28%, after the rebound in the third quarter of 10.75 percent.

In particular, private consumption has been driven by the favorable evolution of remittances, which registered an average annual increase in the fourth quarter of 15.67 percent.

Thus, in 2020, consumption presented an average annual fall of 10.58 percent.

Federal budget and peso

During the fourth quarter of 2020, public sector consumption expenditure was 1.7% higher than the same period of 2019, while it fell 0.2% compared to the immediately previous quarter, being the only component of aggregate demand to decrease.

With the above, government consumption grew 2.3% in 2020 and was the only component to show growth during the year, despite the pandemic.

The foregoing is due to the fact that the Federation’s Expenditure Budget for the year was fully implemented, and even exceeded what was approved by 1.9 percent.

The investment showed an increase at a quarterly rate of 2.91 percent.

In annual terms, it registered a contraction of 12.97%, adding 9 quarters of falls, being the longest period of setbacks, exceeding the eight observed falls that go from the first quarter of 2001 to the fourth quarter of 2002.

In 2020, investment registered an average fall compared to 2019 of 18.35 percent.

International Trade

Finally, in annual terms, exports returned to positive territory after two quarters of falls, increasing 3.82 percent.

At a quarterly rate, exports registered an increase of 1.58%, after the strong rebound of the previous quarter of 40.31 percent.

The “V” shaped recovery in exports is due to the rapid reactivation of the US economy, which was made possible thanks to the broad monetary and fiscal stimulus.

In general, the data continue to confirm a recovery in the form of a «K», with exports showing strength, while components dependent on domestic demand, such as consumption and investment, lag behind.

It should be added that consumption and investment represented 59.8% of aggregate demand in 2020.

During the session, the exchange rate is expected to trade between 20.26 and 20.48 pesos per dollar.

The euro starts the session with a depreciation of 0.33%, trading at 1.1876 dollars per euro, while the pound loses 0.57% and is trading at 1.3845 dollars per pound.

Money market and debt

In Mexico, the yield on the 10-year M bonds remains unchanged, at a rate of 6.65 percent.

Derivatives market and the peso

To hedge against a depreciation of the peso beyond 21 pesos 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 in the aforementioned level.

On the other hand, the interbank forward for sale is at 20.3914 at 1 month, 20.7354 at 6 months and 21.1787 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE