The peso begins the session with a moderate appreciation of 0.18% or 4.5 cents, trading around 24.53 pesos per dollar. A lower appetite for risk is observed in global financial markets, which led the exchange rate to reach a maximum of 24.8881 pesos per dollar overnight.

The lowest appetite for risk is due to the United States’ accusations to the Chinese government regarding the coronavirus. On the one hand, Secretary of State Mike Pompeo told the media that there is «enormous evidence» that Covid-19 started in a laboratory in Wuhan. For his part, Donald Trump has promised to deliver a report with the conclusions on the origin of the pandemic and added that the Chinese government tried to hide the true risk posed by the virus.

Finally, Trump said that the tariffs are a great negotiation tool and that the validity of the trade agreement reached with China at the beginning of the year depends on the increase in purchases of American products, otherwise the agreement will be terminated.

Speculation that trade tensions between the United States and China could increase, rendering the «phase one» trade agreement concluded in January useless, causes capital markets to show falls on average above 3% in Asia and Europe, while the futures market points to losses in the United States.

The peso and oil

In the foreign exchange market, most currencies lose ground against the dollar, with severe declines for several currencies in emerging economies. Along with the Mexican peso, the Russian ruble depreciates 1.19%, the South Korean won falls 0.87% and the Indian rupee depreciates 0.83 percent.

In the commodity market, there is a downward correction in WTI oil prices, as there is no justification in the short term for it to trade stably above $ 20 per barrel.

The WTI begins with a fall of 5.16%, trading at $ 18.76 per barrel, at the risk of new tariff threats by Trump to China in retaliation for the coronavirus pandemic.

Likewise, it must be remembered that excess supply remains in the oil market, so the recovery of the price will depend on the global oil production falling rapidly.

Trump’s comments regarding China over the weekend are confirmation that he will likely use the coronavirus crisis as a campaign tool, accusing China of causing the pandemic and eliminating the likelihood of a reversal of the trade war between both countries.

This also makes a return of trade tensions and the imposition of new tariffs likely.

The peso and the economy

As for economic indicators, last Friday the business confidence indicator for the month of April was published in Mexico, observing falls for manufacturing, construction and commerce.

The manufacturing sector confidence indicator stood at 37.4 points, accumulating 6 months below the 50-point expansion threshold and its lowest level since March 2009.

For their part, the confidence indicators for construction and trade reached new lows of 38.4 and 38.5, respectively, points. In the case of construction, it is worth noting that the indicator has already accumulated 18 months below the expansion threshold of 50 points.

During the week, the market will watch for the release of relevant economic information, in particular the monthly US employment statistics to be released on Friday, where the destruction of more than 20 million people is likely to be seen. jobs Also, the unemployment rate is likely to rise above 15 percent.

During the session, an exchange rate is expected, trading between 24.35 and 25.00 pesos per dollar. The euro begins the session with a depreciation of 0.44%, trading at $ 1.0933 per euro, while the pound loses 0.66% and is trading at $ 1.2424 per pound.

Money market

In the money market, the yield on 10-year Treasury bonds increases 1.7 basis points, to 0.63%, while in Mexico the yield on 10-year M bonds decreases 4.0 basis points, at a rate of 6.57 percent.

Derivatives market

To cover a depreciation of the peso beyond 25.5 pesos per dollar, a call option, with an exercise date within 1 month has a 2.02% premium and represents the right but not the obligation to buy dollars in the level mentioned above.

On the other hand, the interbank forward for sale is at 24.7137 at 1 month, 25.2037 at 6 months and 25.7121 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE