The Mexican peso begins the session with an appreciation of 0.29% or 5.7 cents, trading around 19.86 pesos per dollar.

The appreciation of the peso is due to three factors:

First factor

The market is anticipating the Federal Reserve’s monetary policy announcement to show accommodative language. On this occasion, the Fed will also release an update to its economic projections along with the 1:00 pm statement, followed by a press conference by the president of the Central Bank, Jerome Powell. The dollar weighted index begins the session with a 0.17% decline, losing ground for the third consecutive session.

Second factor

Optimism continues about the possible approval of new fiscal stimuli in the United States. In the United States Congress, Democratic leaders Nancy Pelosi and Chuck Schumer held two rounds of negotiations on the stimulus package with Republican leaders Mitch McConnell and Kevin McCarthy.

According to their testimonies, significant progress was made, but no agreement has yet been reached. All four leaders agree that the package should include funding for the vaccine, small business support, unemployment benefits and educational assistance.

However, the contentious issue remains support for state and local governments that Democrats want to include. An agreement is expected to be reached before the end of the week, and the spending package for fiscal year 2021 must be approved before this Saturday, to avoid a government shutdown.

Third factor

A lower perception of relative risk with respect to Mexico, after the discussion and approval of the Banco de México Law reform was postponed until 2021. It should be noted that during the night the exchange rate touched a minimum close to 19.82 pesos per dollar, which suggests that the exchange rate could go to last week’s levels of 19.70 pesos in the short term.

Industry

Regarding economic indicators, the leading PMIs for the month of December were published in Europe. The Eurozone Total Activity Composite PMI index stood at 49.8 points, above the previous reading of 45.3 points. For its part, the services index also increased during December, standing at 47.3, after the previous reading of 41.7 points.

Finally, the manufacturing PMI stood at 55.5 points from the 53.8 registered in November and registering a new maximum in the last 31 months. Inside, new orders increased slightly, their first advance since September. By country, Germany stands out, where the Total Activity index registered an expansion for the sixth consecutive month, with its Composite PMI registering a reading of 51.7 points.

The publication of these indicators and their positive results have also generated optimism, mainly in the capital markets of Europe, where the main indices advance on average close to 0.65%, with the greatest advance recorded by the DAX of Germany that advances 1.50 per cent.

US market

In November, US retail sales decreased at a monthly rate of 1.1%, the second decline since April after the October figure was revised from 0.3% to -0.1%. In their annual variation, they increased at a rate of 4.1%, spinning five consecutive months of annual increases. In the interior, the largest monthly contractions were observed in clothing and accessories stores (-6.8%) and in restaurants and bars (-4.0%), which indicates a slowdown in consumption due to the increase in cases of Covid19 and the hardening in containment measures.

Indicators of Banxico

The peso and other currencies

During the session, the exchange rate is expected to trade between 19.82 and 19.99 pesos per dollar. The euro starts the session with an appreciation of 0.27%, trading at 1.2184 dollars per euro, while the pound shows an appreciation of 0.47% and is trading at 1.3523 dollars per pound.

Money market and debt

In the United States, the yield on the 10-year Treasury bonds increases by 3.2 basis points, to 0.94%, while in Mexico the yield on the 10-year M bonds remains unchanged at a rate of 5.69 percent.

Derivatives market

To hedge against a depreciation of the peso beyond 20.00 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.25% 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 19.9375 at 1 month, 20.2734 at 6 months and 20.6954 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE