The peso starts the session with an appreciation of 0.68% or 14.9 cents, trading around 21.63 pesos per dollar.

During the overnight, the exchange rate reached a maximum of 21.9430 pesos, as the perception of risk in global financial markets increased.

However, it began to recover during the morning and went to positive terrain after the publication of inflation in Mexico, a figure that exceeded market expectations and that generates the idea that Banco de México will be more cautious to continue cutting its interest rate.

During August, inflation stood at 4.05% year-on-year. In its monthly variation, an advance of 0.39% was observed. Within core inflation, effects in opposite directions continue to be observed.

On the one hand, the merchandise subcomponent registered a monthly advance of 0.47%, as it continued to be pressured by the 0.63% monthly increase in the prices of non-food merchandise.

On the other hand, the weak advance in the price of services reflects that demand remains weak, with an increase of 0.15% per month.

For its part, the non-core component was pressured by the increase in the prices of agricultural products (0.88%), derived from a higher monthly inflation in fruits and vegetables of 2.97%, which was caused by the effects during the first half of August of Hurricane Hanna in the northeast of the country. Banco Base anticipates that inflation at the end of the year will be 3.75 percent.

On the other hand, the National Producer Price Index (INPP) registered an increase of 0.52% compared to the previous month and an increase of 5.12% at the interannual rate.

The peso and Covid-19

Despite the appreciation of the peso, a strong dollar continues to be observed in the exchange market.

The dollar weighted index advanced 0.10%, maintaining its upward trend since September 1.

This is due to uncertainty regarding the development of the vaccine against Covid19. The pharmaceutical company AstraZeneca, together with the University of Oxford, announced that they will pause clinical trials of their experimental vaccine. This is because one of the people in the study developed a serious illness, so researchers must examine whether it is related to the vaccine.

With regard to Covid-19, in India more than a thousand deaths have been reported daily, for 8 days in a row, being the country with the highest number of daily deaths and accumulating 73,953 deaths from coronavirus.

For his part, in the United Kingdom, Prime Minister Boris Johnson banned the meetings of more than 6 people as a measure to stop the spread of coronavirus. Also, new restrictions are expected to be announced during a press conference later today.

Finally, there is also the risk that, during election campaigns in the United States, the debate between Joe Biden and Donald Trump will turn protectionist.

Democratic candidate Joe Biden has proposed a 10% tax on companies that move their operations abroad, similar to Donald Trump’s initiative announced Monday. In addition, Biden added that he is committed to taking executive action once in office to direct the government to buy American goods and support American supply chains.

Today he is expected to delve deeper into his economic proposals during his campaign trip in Michigan.

Technology

In other financial markets, the capital markets of Europe show a moderate rebound on average close to 0.50%, while, in the United States, the futures market points to a moderate recovery of the main indices, after three consecutive sessions of falls deep, mainly in broadcasters in the technology sector.

There is also a rebound in the commodity market, particularly in energy prices.

The price of oil starts the session trading at 37.45 dollars per barrel, showing an increase in its price of 1.88%, in a rebound effect after the losses observed during the day on Tuesday.

Despite the increase, there is still nervousness around the demand for energy.

Finance

On the other hand, yesterday afternoon the Economic Package 2021 was published in Mexico. The package shows a balanced budget where it is assumed that the budget income for the following year contracts 0.5% in real with respect to the estimated income for 2020, although the drop is 3.0% in real terms when compared to what is approved in the 2020 Income Law.

On the other hand, programmed expenditures rise 3.1% nominal and fall 0.3% real. In the General Criteria of Economic Policy, it is highlighted that the Ministry of Finance assumes that this year the Mexican economy will fall around 8% and that it will have a rebound effect in 2021 with growth of 4.6 percent.

Indicators of Banxico

Both economic scenarios are considered optimistic, since the Mexican economy is expected to fall around 9.5% this year and that the following year it will recover at a rate of 3 percent.

Regarding the price of oil, the Ministry of Finance assumes 42.1 dollars per barrel, while it assumes a production of 1,857 million barrels per day barrels.

The price of oil is considered at an adequate level, since the demand for hydrocarbon may rise the following year due to the greater mobility of people, but the expected oil production is also optimistic, so it is another risk to consider within of the proceeds of the package delivered yesterday.

During the session, the exchange rate is expected to trade between 21.50 and 21.80 pesos per dollar. The euro starts the session with a marginal appreciation of 0.02%, trading at 1.1780 dollars per euro, while the pound depreciates at 0.35% and is trading at 1.2937 dollars per pound.

Money market and debt

In the United States, the 10-year Treasury yield remains unchanged at 0.675%, while in Mexico the 10-year M bond yield remains unchanged at 6.03 percent.

Derivatives market

To hedge against a depreciation of the peso beyond 22.50 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.10% 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 21.7798 at 1 month, 22.1589 at 6 months and 22.6428 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE