The peso closed the session with a depreciation of 2.54% or 51.7 cents, trading around 20.89 pesos per dollar, with the exchange rate touching a minimum of 20.3714 and a maximum of 21.0363 pesos per dollar, a level not seen since November 5, being the largest daily drop in the peso since September 23, 2020.

Peso

The strong upward movement in the exchange rate is due to a combination of two factors:

First factor

A significant and accelerated strengthening of the US dollar in the foreign exchange market.

The dollar weighted index advanced 0.65%, the largest increase in one day since September 23, mainly as a result of a strong increase in the yield rates of Treasury bonds in the secondary market.

The movement was accentuated around 12:00 central Mexico time, after an auction in the United States of 62 billion dollars of 7-year Treasury bonds, with a demand of 2.04 times what was placed, being the lowest since 2009, while the difference between the pre-auction rate and the highest rate in the auction was 4.2 basis points, something not seen before for similar placements.

Likewise, the low demand in the primary bond market, which was already being reflected in the secondary market since the end of January, was the result of a reduction in risk exposure to possible increases in the interest rate.

While Federal Reserve officials have reiterated that they will keep the interest rate unchanged and liquidity injections will continue, strong economic indicators for the US economy are prompting a reaction similar to the “Taper Tantrum” of 2013, when rates reacted upward due to the announcement of a gradual normalization of monetary policy after the Great Recession of 2008-2009.

Bond

It should be remembered that there is an inverse relationship between the interest rate and the price of a bond, so that increases in the rate imply losses in the value of the portfolios in the short term.

In the bond market, the rate of return on 10-year Treasuries reached a maximum of 1.6085%, a level not seen since February 14, 2020.

At the close of today, the rate stood at 1.53%, rising 15.8 basis points, an increase not seen since March 17 of last year.

In the month, the rate accumulates an increase of 46.7 basis points and so far it is shaping up to be the largest monthly increase since November 2016.

It should be added that the strong increase in interest rates, associated with a reduction in exposure in investment portfolios, also caused losses in the capital market, mainly in the United States.

The Nasdaq closed down 3.52%, while the S&P 500 closed down 2.45 percent.

Second factor

Risk perception regarding Mexico remains high. After the approval of the reform to the Electricity Industry Law in the Chamber of Deputies this week, the probability of upward adjustments in the exchange rate has increased.

Today, the rating agency Moody’s pointed out that the reform will not trigger an automatic cut in the sovereign rating, although it does represent a risk for the rating of companies in the energy sector, since it discourages investment.

For her part, Julie Chung, Acting Undersecretary of the Office of Western Hemisphere Affairs of the State Department, encouraged Mexico to listen to interested parties and private sector companies so that investment in the country continues, the foregoing in response A media question about the changes proposed to the electricity sector in Mexico.

Banxico

On the other hand, this morning the minutes of the last monetary policy meeting were published in Mexico. A divided opinion among the members of the Governing Board was highlighted, where several pointed out the importance of prioritizing the inflation objective and caution, to avoid a de-anchoring of expectations in the coming months.

It should be noted that the most recent inflation data up to the first half of February show additional risks to the upside, which, combined with an arithmetic effect during the second quarter, increases the probability that the Governing Board will keep the interest rate unchanged.

The peso and the exchange rate

In the session, the euro touched a minimum of 1.2156 and a maximum of 1.2243 dollars per euro.

Finally, the euro peso touched a minimum of 24.7819 and a maximum of 25.6439 pesos per euro.

At the close, the interbank quotes for sale stood at 20.8522 pesos per dollar, 1.4013 dollars per pound and 1.2170 dollars per euro.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE