The Mexican peso falls against the dollar to 20.70

The peso starts the session with an appreciation of 0.13% or 2.7 cents, trading around 20.70 pesos per dollar, with the exchange rate touching a minimum of 20.6533 and a maximum of 20.7666 pesos.

The peso ranks as the second most appreciated currency in the foreign exchange market, although this is the result of a correction to the sharp decline in the previous six sessions, something that was expected.

Among the main crosses of the dollar, a mixed performance is observed, with the weighted index of the US dollar advancing moderately with 0.05 percent.

In the capital market, losses continue to be observed, with the main indices in Europe falling on average 0.58%, while in the United States the future market shows that there could be falls in the opening, mainly in issuers of the technology sector, with the Nasdaq registering a decline of 1.51 percent.

This indicates that the market continues to speculate that the economy will recover at an accelerated rate, which could lead to inflationary pressures and a less flexible stance on the part of the Federal Reserve. The falls are greater in broadcasters in the technology sector as they were the most benefited during the pandemic.

In the bond market, interest rates remain stable, with the 10-year Treasury bond rate hovering around 1.36 percent.

The peso

The market is waiting for Federal Reserve Chairman Jerome Powell to present the Central Bank’s semi-annual report and testimony before the Senate Banking Committee. He is likely to reiterate the Federal Reserve’s broadly flexible stance and the absence of inflationary risks in the short term.

In the session, the performance of the exchange rate will depend on the market’s reaction to Powell’s comments.

In subsequent sessions, there are still upward risks for the exchange rate, as the main determinants of the depreciation of the peso are internal.

The National Survey of Construction Companies (ENEC) for December showed that the value of construction production contracted at a monthly rate of 0.49% according to seasonally adjusted figures, accumulating three consecutive months down.

In annual terms, it showed a contraction of 22.55%, spinning 30 months of consecutive setbacks.

Construction has been one of the sectors hardest hit by the health crisis, because during the strictest phase of confinement (April), the sector was forced to completely suspend activities.

Although from the second half of May it was classified as essential, the rebound was modest in the following months due to the uncertainty generated by the course of the pandemic.

With this, in 2020 the value of construction production according to the ENEC registered an average annual fall of 24.83%, surpassing the fall of 2019 of 8.14% and adding eight consecutive years of contractions.

Mayan Train

 Regarding the value of production by subsector in original figures, the three subsectors closed the year with strong annual falls, where civil engineering works continue to lag with an annual fall of 26.47%, after decreasing 25.73% in November.

Civil engineering works have been affected by delays in the government’s flagship projects, the Maya Train and Dos Bocas, due to work stoppages due to poor working conditions in the refinery construction and legal blockades due to possible environmental damage in the Mayan Train area.

On the other hand, specialized jobs for construction registered an annual contraction of 21.77%, higher than the 19.04% decline in November. Meanwhile, construction fell at an annual rate of 19.29% (Vs. -23.21% in November).

The construction of the private sector continues to be considered an essential activity, so the return to red at the epidemiological traffic light of 6 states at the end of last year probably had a negative impact on construction.

Refinery

At the state level, only 8 of the 32 entities in the country showed annual growth in their production value during December.

Among the entities with the greatest annual advances, Oaxaca (327.50%), Sinaloa (63.75%) and Tabasco (60.66%) stand out, recalling that Oaxaca was affected by major earthquakes a year ago, slowing down construction in the state, so growth it is due to a low base of comparison.

For its part, the value of production in Tabasco has been supported by the construction of the Dos Bocas Refinery and has already made five consecutive months of annual progress.

In fact, Oaxaca and Tabasco are the two entities that showed the highest average annual growth in 2020, with 92.04% and 20.81%, respectively. However, these entities only represent 6.4% of the total production value of the country’s construction sector.

Construction and the peso

 For its part, Nuevo León, the state that represents the highest percentage of total production (12.4%), managed to average an annual growth of 1.61% in 2020, well below the 2019 average of 6.44 percent.

Specifically in December, the value of the production of Nuevo León showed an annual fall of 11.94%, being its biggest contraction since April 2020.

Going forward, it is expected that the entities of the south-southeast of the country will continue to be driven by large projects such as the Mayan Train and the Dos Bocas Refinery.

As for the northern states, the Mexican Chamber of the Construction Industry (CMIC) indicated that they are betting on private investment to boost the sector in this region.

Investment

For 2021, despite the fact that the federal government budget has an increase in physical investment of 10.23% compared to 2020, it may not be enough to reactivate construction, since the domestic uncertainty that prevails in the country does not generate optimal conditions to promote investment and thus construction, highlighting:

1) The lag in the vaccination campaign. As of February 21, Mexico has applied 1.31 doses per 100 inhabitants, which would cause a slow normalization of economic activity.

2) The implementation of unorthodox economic policies such as the approval in Congress of the Electricity Law, which aims to give priority to the dispatch of energy to the Federal Electricity Commission (CFE), further affecting investment in the construction of the energy sector.

3) The lack of an expansive fiscal policy. Various companies have run out of resources to invest in construction. The foregoing has been reflected in the current portfolio for the non-banking private sector, where construction-related companies presented a real annual contraction of 11.5% in 2020, after contracting 6.9% in 2019.

Electricity

It should be added that today the reform of the Electricity Industry Law will be voted in the Chamber of Deputies, which aims to give priority to the state over individuals in the sector, which could have negative effects due to increases in tariffs for consumers and pressures on public finances. It should be remembered that the reform was approved in commissions last Friday, February 19.

During the session, the exchange rate is expected to trade between 20.62 and 20.85 pesos per dollar.

The euro starts the session with a depreciation of 0.12%, trading at 1.2143 dollars per euro, while the pound advances 0.01% and is trading at 1.4064 dollars per pound.

Money market and debt.

In the United States, the yield on the 10-year Treasury bonds remains unchanged at 1.36%, while in Mexico the yield on the 10-year M bonds increases by 1.0 basis point, at a rate of 6.20 percent.

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 1.82% 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, 21.1039 at 6 months and 21.5277 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE