The foreign exchange market awaits signals from the Fed

The foreign exchange market shows a mixed performance against the dollar, with the weighted index showing little change and losing 0.02% compared to Friday’s close, as market participants are waiting for new signals about about the future of US economic policy. 

Today the president of the Fed, Jerome Powell, will participate in a panel of the Bank for International Settlements, where he could again address the issue of the path that monetary policy will follow, while on Tuesday and Wednesday he will present himself, as well as the secretary of the Treasury, Janet Yellen, before committees of the House of Representatives and the Senate.

The comments that arise in these meetings could influence the performance of the financial markets during the week.

Other relevant events will be the Treasury bond auctions in the United States.

On Wednesday the 24th, 61 billion dollars in 5-year bonds will be auctioned, while on Thursday, the 25th, 62 billion dollars in 7-year Treasury bonds will be auctioned, which will be followed with special attention.

It should be remembered that an important part of the upward pressure on the dollar occurred after the last auction of 7-year Treasury bonds on February 25, when demand for the instrument fell.

In the last month, the demand for debt instruments has been reduced, in an effort by investors to reduce their exposure to future monetary policy adjustments towards a less flexible stance.

Exchange market

Despite the fact that the dollar shows little change, the most important emerging economy currencies lose ground at the beginning of the session, with the Mexican peso showing a depreciation of 0.69% or 14.2 cents and trading around 20.65 pesos per dollar.

So far this session, the exchange rate has traded between a minimum of 20.6085 and a maximum of 20.8813 pesos per dollar.

The depreciation is a direct result of a higher perception of risk over Turkey, after President Recep Tayyip Erdogan fired the governor of the central bank, Naci Agbal, who was in charge of the bank for four months in which the monetary policy rate was adjusted up 875 basis points to 19 percent.

The Turkish lira has depreciated 9.63% since last Friday trading at 7.9139 lira per dollar, touching a maximum of 8.4707 lira per dollar, close to the historical maximum of 8.5793 reached in November 2020.

Uncertainty is expected to continue in the Turkish markets, as the Istanbul stock market loses 9.52%, while, in the bond market, the rate of 10-year Turkish bonds issued in dollars rises 150 basis points to 7.46 percent.

It should be noted that inflation in Turkey stood at 15.61% in February and the new governor of the Central Bank, Sahap Kavcioglu, has spoken in favor of cutting the interest rate and even supports Erdogan’s position (contrary to what he says economic theory) that high interest rates lead to higher inflation.

The peso

In the foreign exchange market, the most depreciated currencies are the Turkish lira (-9.63%), the Brazilian real (-0.95%), the Mexican peso (-0.69%), the Russian ruble (-0.66%) and the South African rand (- 0.22 percent).

Although there is no significant economic relationship between Turkey and Mexico, the contagion effect of the depreciation of the Turkish lira towards the Mexican peso is due to the fact that the national currency is the Latin American currency with the highest volume of operations and is used to speculate on risks in other countries.

During the week, the publication of relevant economic indicators in Mexico will be key.

On Wednesday 24 the inflation for the first half of March will be published, which Grupo Financiero Base expects to be close to 3.85% per year, while on Thursday the Global Economic Activity Indicator for the month of January will be published, which will probably show a stagnation in the monthly growth.

That same day at 1:00 p.m. will be the announcement of Banco de México’s monetary policy, where the Governing Board is likely to keep the target interest rate unchanged at 4.00 percent.

Manufacture

Regarding economic indicators, this morning the Monthly Survey of the Manufacturing Industry was published for the month of January.

In the month, the value of the real production of the manufacturing industry weakened, as it registered an annual decline of 1.20%, the first after four months of increases and after growing 7.64% in December, according to original figures.

Manufacturing was dragged down by the weak performance of the value of production in the manufacture of transportation equipment, going from a real annual increase in December of 9.21% to a contraction of 10.16% in January, the largest drop since June 2020.

Likewise, the unfavorable dynamics of the manufacture of computer equipment stands out, falling at a real annual rate of 12.98% (vs. + 9.18% in December).

This is a reflection of the global shortage of semiconductors at the beginning of the year that has affected the production of some electrical appliances and the automotive sector.

Production value

In the breakdown by federal entity, 17 of the 32 states presented real annual growth in their production value during January, where only six were double-digit growth, compared to the 13 observed in December.

The states with the highest growth in the real value of production were Campeche (55.6%), Oaxaca (34.6%), Quintana Roo (31.8%), Nayarit (23.6%), Baja California (23.3%) and Yucatán (12.3 percent) .

However, these states together represent less than 8% of the country’s total manufacturing. On the other hand, of the three states with the highest participation in the national manufacturing industry, Nuevo León, Estado de México and Coahuila, only Nuevo León and Coahuila presented real annual growth during January, advancing 9.3% and 3.0%, respectively.

While, the value of the production of the State of Mexico showed an annual fall of 10.2% during the first month of 2021.

Exchange market and Adversities

For February, the outlook for the manufacturing sector became more complex due to:

1) A further deterioration of epidemiological conditions, causing 13 states to be located in red at the epidemiological traffic light.

2) Blackouts and gas supply problems as a result of the winter storm that hit Texas and northern Mexico in the middle of the month.

3) The continuation of the global semiconductor crisis. Leading indicators have already reflected the impact of these shocks, highlighting the IMEF manufacturing PMI for February, which stood at 49.1 points, falling 0.30 points compared to January. Likewise, the automotive registry showed an annual contraction of 28.85% in the production of cars in February.

During the session, the exchange rate is expected to trade between 20.52 and 20.78 pesos per dollar. The euro starts the session with an appreciation of 0.14%, trading at 1.1921 dollars per euro, while the pound loses 0.25% and is trading at 1.3837 dollars per pound.

Money and Debt Market

In the United States, the yield on 10-year Treasury bonds decreased by 2.8 basis points, at a rate of 1.69%, while in Mexico the yield on 10-year M bonds increased by 5.4 basis points, to 6.71 percent .

Derivatives Market and Foreign Exchange Market

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% 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 20.7672 at 1 month, 21.1144 at 6 months and 21.5728 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE