The peso starts the session with a depreciation of 0.66% or 13.7 cents, trading around 20.79 pesos per dollar, with the exchange rate touching a minimum of 20.5925 and a maximum of 20.9322 pesos, before a return of the upward pressure of the dollar U.S.

The dollar weighted index begins the session with an advance of 0.50%, being the first in four sessions and erasing most of Thursday’s fall.

In the foreign exchange market, almost all currencies in the wide basket of main crosses show a depreciation.

The Mexican peso was the most depreciated currency, although it cut losses as of 7:30 am, when the Producer Price Index was published in the United States.

Producer inflation was 0.5% per month during February, in line with market expectations, after having increased 1.3% during January. In its annual variation, producer inflation was 2.8%, being the sixth consecutive annual increase.

The peso

Annual inflation excluding food, energy and commerce was 2.2 percent.

In recent weeks, the market has been particularly attentive to price indicators in the United States, due to speculation about inflationary pressures and that, as a consequence, the Fed would begin to moderate its monetary stance, which until now has been largely accommodative .

The strengthening of the dollar continues to be associated with upward pressure on interest rates in the bond market, with the 10-year Treasury bond rate advancing 5.4 basis points to 1.59%, touching a maximum of 1.61%, close to the maximum in the year of 1.6238 percent.

The pressures are due to persistent speculation that the Federal Reserve may adopt a less flexible monetary stance in the face of the accelerated economic recovery in the United States.

Although on average, expectations for US economic growth in 2021 are close to 5%, which was already considered an optimistic scenario, some projections in the market are between 6 and 7 percent.

To the above, it is added that yesterday Joe Biden enacted the Coronavirus Relief Law for 1.9 billion dollars.

Covid-19

On the other hand, during his press conference Biden said that by May 1 all American adults will be eligible to be vaccinated, hoping to begin with the complete reopening of their economy by early July.

Greater caution is observed in other financial markets, mainly in the capital market, where global indices show a mixed performance, with average losses of 0.45% in Europe.

In the United States, the futures market indicates that strong losses of around 1.4% could be observed on the Nasdaq, as the prices of issuers in the technology sector fall.

In terms of economic indicators, the UK GDP contracted at a monthly rate of 2.9% during January, given the tightening of containment measures at the beginning of the year.

The UK economy was 9.0% below the pre-pandemic level (February 2020) and 4.0% below the October 2020 level, when the initial peak of the recovery was observed.

The publication of the data did not have a significant effect on capital market performance, as the FTSE 100 advanced 0.06%, this is due to the fact that economic activity in January does not reflect the reality of the economic reactivation of the United Kingdom in February and March with the availability of vaccines against Covid-19.

Industry

In Mexico, industrial activity registered a monthly growth of 0.25% in January, adding 8 months in recovery.

In annual terms, industrial activity registered a contraction of 3.65% (Vs. -3.18% in December), spinning 23 months of setbacks, equaling the largest period of consecutive falls that was from February 2001 to December 2002.

Construction and the peso

It should be noted that the figure was better than anticipated by the Timely Indicator of Industrial Activity (IOAE) of INEGI, which marked an annual contraction of 4.1% in the month. Secondary activities are 7.12% below their last peak reached in May 2018.

Industrial activity in January was driven by construction, showing a monthly growth of 1.45%, after falling 2.21% the previous month.

It is worth remembering that construction, being classified as an essential activity, was not strongly limited by the reinforcement of sanitary measures in the month. However, at an annual rate, construction is the activity that lags the most, registering a contraction of 10.46%.

On the other hand, construction grew 0.10% per month (-12.52% annually) and specialized jobs grew at a monthly rate of 0.64% and an annual rate of 0.49%, the first increase after 25 months of annual falls.

Manufacturing activity fell 0.55% compared to December, interrupting 7 consecutive months of recovery.

With this, manufacturing once again registered an annual contraction of 0.96%, after growing 0.45% in December.

Within manufacturing, the monthly decline of 3.74% in the manufacture of transportation equipment stands out, consistent with the challenges that the automotive sector has presented since the beginning of the year, as a result of the shortage of semiconductors.

Energy

The generation and distribution of electricity, water and gas fell at a monthly rate of 1.70% and an annual rate of 4.81%, while mining advanced 0.25% monthly and contracted at an annual rate of 3.54 percent.

In February, industrial activity was also affected by transitory shocks, highlighting: 1) the harsh epidemiological conditions, causing thirteen states to be placed on maximum alert; and 2) the winter storm in the middle of the month that hit Texas and northern Mexico, causing blackouts and gas supply problems for a few days. It is worth mentioning that this last point is expected to show a strong direct impact on the generation and distribution of electricity, water and gas when the February data is published.

During the session, the exchange rate is expected to trade between 20.67 and 20.97 pesos per dollar.

The euro starts the session with an appreciation of 0.40%, trading at 1.1938 dollars per euro, while the pound loses 0.66% and is trading at 1.3898 dollars per pound.

Money and Debt Market

In the United States, the yield on 10-year Treasury bonds increased 4.7 basis points, to 1.58%, while in Mexico the yield on 10-year M bonds increased 1.1 basis points, at a rate of 6.26%.

Derivatives market and the peso

To hedge against a depreciation of the peso beyond 21 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 2.32% 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 20.8761 at 1 month, 21.2175 at 6 months and 21.6478 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE