The peso starts the session with an appreciation of 0.50% or 10 cents, trading around 19.84 pesos per dollar, with the exchange rate touching a maximum of 19.9686 and a minimum of 19.8312 pesos per dollar.

The appreciation of the peso occurs alongside a strengthening of most currencies and a weakening of the US dollar, which loses 0.12% according to the weighted index, accumulating five consecutive sessions down 1.29 percent.

Likewise, the foreign exchange market is responding to the expectation that the Federal Reserve will maintain a broadly flexible monetary stance because there are downside risks to the recovery of employment, despite the fact that inflation is rising and will probably be close to 3.7% annually. in April, data that is published early tomorrow.

Several regional Federal Reserve presidents will make public comments today: John Williams of the New York Fed, Mary Daly of the San Francisco Fed, Raphael Bostic of the Atlanta Fed, and Patrick Harker of the Philadelphia Fed, as well. Lael Brainard of the Committee of Governors of the Federal Reserve. His comments will be closely followed by the market, especially prior to the publication of the inflation data for April.

The peso

Among the currencies that appreciated the most this morning, several of the countries that produce raw materials stand out, such as the South African rand that appreciated 0.62%, the Polish zloty with 0.58%, the Mexican peso with 0.50%, the Russian ruble with 0.49%, the Swedish krona with 0.49% and the Norwegian krone with 0.37 percent.

In the raw materials market, a mixed performance is observed, with energy prices falling, in particular oil prices such as WTI, which fell 1.20% to 64.15 dollars per barrel.

In contrast, metals, both industrial and precious, advanced, with aluminum rising 1.26%, copper 1.25%, gold 0.18%, iron 1.17% and steel 3.82 percent.

There is pessimism in the capital markets since the Asian session, where indices such as the Nikkei 225 lost 3.08% and the Hang Seng of Hong Kong fell 2.03 percent.

In Europe, the main indices fall on average about 2.00% and in the United States, the futures market indicates that losses could be observed, mainly in issuers of the technology sector, as the Nasdaq fell 1.60% before the opening.

Fed

Unlike other markets, capital market losses are associated with the risk that higher inflation data will force the Federal Reserve to adopt a less flexible stance.

An indicator to measure the implicit expectations of inflation on the part of the market, is the differential between the yields of the Treasury bonds, whose return is nominal, and the TIPS (Treasury Inflation Protected Securities), which are bonds indexed to inflation and whose return is real.

In the case of 5-year Treasury bonds, this spread reached a maximum of 273.5 basis points, a level not seen since September 2005 and above the previous maximum of 247 basis points, reached in 2011 after the Great Recession.

Prices

Regarding economic indicators, in Mexico the monthly private consumption indicator for February showed a monthly contraction of 0.17% according to seasonally adjusted figures, averaging a monthly growth of -0.04% between December and February.

It should be remembered that in these three months economic activity contracted due to the emergence of coronavirus cases and increases in energy prices and low temperatures, which affected economic activity in February.

At an annual rate, private consumption contracted 6.47%, accumulating 15 months of consecutive falls and equaling the largest period of falls on record between September 2008 and November 2009.

Going forward, consumption is expected to grow at a monthly rate during March, due to the fact that in that month a reactivation of economic activity was observed, but it is highly probable that a contraction will continue to be observed at the annual rate, adding 16 months of annual contractions.

For annual growth to be observed in March, consumption should grow more than 4.1% per month.

In April, it is highly probable that an annual growth rate of more than 20% will be observed, but this will be due to a comparison base effect, since April 2020 is when a slump in economic activity was observed at the beginning of the pandemic in Mexico.

Services

Within the monthly indicator of private consumption, the consumption of national goods shows an annual contraction of 0.52%, standing since October 2020 with contractions close to 0%. This is evidence that the consumption of goods has been close to a full recovery since then.

In contrast, service consumption shows an annual contraction of 14.06% and is the component with the greatest lag, since services have seen a slow recovery.

During February, the consumption of national services grew 0.35% and a more accelerated recovery is likely to be observed in the data for March and April. Finally, imported goods show an annual growth of 2.92%, accumulating three months on the rise.

Capitals

Finally, INEGI published the figures for the monthly Gross Fixed Investment indicator for the month of February 2021, which shows a growth of 2.4% in real terms compared to the previous month.

The growth was observed in investment in imported machinery and equipment (1.9%), especially transportation equipment (5.1%), and in investment in construction (2.6%), both residential (2.5%) and non-residential (1.6%). ).

After this advance in the month, gross fixed investment registers its lowest annual contraction since December 2019, falling 3.5% and accumulates 25 months of annual contractions.

This deterioration, which began in the second half of 2018, has brought the total investment indicator to the levels of the first quarter of 2011.

Although the indicator is 4.2% below the average for the first quarter of 2020 (before the pandemic), to reach the maximum observed in July 2018 it would have to grow 20.7 percent.

Breaking down this analysis, although investment in machinery and equipment has already recovered its pre-pandemic level, it still needs to grow 24.9% to reach the level of July 2018.

On the other hand, investment in construction is still 7.3% below the average for the first quarter of last year, with non-residential construction being the most affected, which accumulates 29 consecutive months of annual contractions.

The economy and the peso

The general deterioration of investment began in the second half of 2018.

Although, prior to this, investment in construction had practically stagnated since 2008, investment in machinery and equipment showed sustained growth and the total indicator continued to grow.

Investment changed to a negative trend given the political and economic uncertainty in Mexico under the current administration, which to date has driven an agenda focused on reversing the structural reforms of the last three decades and increasing the role of the State in the economy of Mexico. Mexico.

During the session, the exchange rate is expected to trade between 19.79 and 19.99 pesos per dollar.

The euro starts the session with an appreciation of 0.31%, trading at 1.2167 dollars per euro, while the pound advances 0.21% and trading at 1.4147 dollars per pound.

Money market and debt

In the United States, the yield on the 10-year Treasury bonds remains unchanged at 1.61%, while in Mexico the yield on the 10-year M bonds increases by 0.8 basis points, at a rate of 6.78 percent.

Derivatives market and the peso

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 1.67% 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 19.9049 at 1 month, 20.2613 at 6 months and 20.7099 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE