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The peso (19.65 vs. dollar) and structural reforms in Mexico

The peso starts the session with an appreciation of 0.30% or 5.9 cents, trading around 19.65 pesos per dollar, with the exchange rate touching a maximum of 19.7233 and a minimum of 19.6113 pesos, a level not seen since January 21 when the The exchange rate hit a minimum in the year of 19.5494 pesos per dollar.

In the session, the Mexican peso ranks as one of the most appreciated currencies in the wide basket of main crosses, only behind the Hungarian forint with 0.58%, the Czech crown that advanced 0.32%, the Polish zloty with 0.31% and the Norwegian krone with 0.31 percent.

Mexican peso

The appreciation of the peso to levels below the key support of 19.70 pesos is due to the following three factors:

First factor

Risk perception regarding Mexico continues to decline following the results of the weekend’s federal elections, reducing the likelihood of structural reforms that put confidence and economic growth in Mexico at risk.

It should be added that usually after elections are held in Mexico, the Mexican peso tends to gain ground, as market caution is reduced.

Second factor

This morning a weakening of the US dollar is observed, which loses 0.17% according to the weighted index of the dollar, so that most of the currencies in the wide basket of main crosses are gaining ground.

The foregoing occurs alongside a decrease in interest rates in the secondary market in the United States, where the 10-year Treasury bond rate decreases 3.7 basis points, standing at 1.49%, before portfolio adjustments prior to the US inflation release for May, to be released tomorrow.

In the last two sessions, the 10-year Treasury bond rate accumulates a decline of 7 basis points and the 1.49% level is the lowest since May 7.

Third factor

The price of major oil blends continues to rise as summer demand remains strong, while the Iran nuclear deal remains unresolved.

Given this, the WTI starts the session trading around 70.41 dollars per barrel with an increase in its price of 0.51 percent.

The WTI reached a maximum of 70.62 dollars per barrel, not seen since October 17, 2018. So far this year it shows an increase of 45.12% and in 12 months it increases 80.77 percent.

Monetary policy and the peso

Little relevant economic information will be published in the session in the United States, so exchange rate movements will depend mainly on the perception of risk with respect to Mexico, fluctuations in the commodity market and speculation in the exchange market on the currency. future of US monetary policy.

From a technical point of view, the drilling of the key support of 19.70 pesos per dollar opens the door for the exchange rate to fall to new lows for the year in the short term.

Regarding economic indicators, inflation in Mexico corresponding to May was at an annual rate of 5.89%, slightly above market expectations, as a fortnightly inflation, higher than expected, of 0.17% was observed during the second fortnight. of the month.

Monthly inflation stood at 0.20%, the highest since 2002, omitting the monthly inflation of 0.38% in May 2020, when price distortions were observed during the first months of the Covid19 pandemic.

Inflation, being slightly higher than expected, generates speculation that Banco de México will continue to be cautious in the conduct of its monetary policy.

Inflation

In the interior, the greatest inflationary pressures were concentrated in the underlying component, that is, in core inflation on which monetary policy is effective.

Core inflation was at an annual rate of 4.37% and a monthly rate of 0.53%, being the highest for the same month since 1999, when it was at 0.97 percent.

Within core inflation, increases were mainly observed in merchandise prices (0.62% monthly and 5.76% annually), mainly in food merchandise (0.81% monthly and 5.49% annually).

For its part, the non-core component showed a monthly inflation of -0.75% and an annual inflation of 10.76 percent.

Annual inflation is explained by increases in raw material prices during the first months of the year, while the decrease in prices during the month is due to programmed decreases in energy prices, mainly electricity rates.

Towards the end of the year, the expectation of an annual inflation of 5% remains.

Industry

On the other hand, the Monthly Industrial Activity Indicator by federal entity for February 2021, showed that 11 states have recovered their pre-pandemic levels (February 2021) by showing a positive annual variation, highlighting the states of Chiapas (20.65%) , Oaxaca (17.60%), Baja California (10.48%), Durango (9.23%) and Nayarit (9.78%). It should be remembered that the states of Chiapas and Oaxaca have benefited from public investment.

For their part, the growth of Durango and Nayarit may be the result of the increase in the value of construction production that they have presented in recent months.

These entities represent 7.15% of the national industrial activity.

The states that show the greatest drops relative to their pre-pandemic level, by showing a negative annual variation, are: Colima (-35.15%), Morelos (-17.06%), Puebla (-12.97%), Tlaxcala (-11.74 %), Veracruz (-11.65%) and Tamaulipas (-11.05%), entities that account for 15.36% of total industrial activity.

These states have presented decreases in the value of construction production.

It should be noted that the states of Puebla (-12.96%), Veracruz (-11.65%), Tamaulipas (-11.05%), Guanajuato (-4.30%), State of Mexico (-3.57%) and Nuevo León (-1.21%) They continue to show annual contractions as of February, so that industrial activity has not yet fully recovered to pre-pandemic levels. These entities account for 40.22% of the national industrial activity.

During the session, the exchange rate is expected to trade between 19.59 and 19.76 pesos per dollar. The euro starts the session with an appreciation of 0.17%, trading at 1.2194 dollars per euro, while the pound loses 0.09%, reaching 1.4144 dollars per pound.

Money market and debt

In the United States, the yield on the 10-year Treasury bonds shows a decrease of 4.6 basis points, reaching 1.49%, while in Mexico the yield on the 10-year M bonds remains unchanged at a rate of 6.51 per hundred.

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 1.21% 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 19.7000 at 1 month, 20.0482 at 6 months and 20.5136 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE

 

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