The peso (19.95 vs. dollar) and the Fed’s monetary policy

In May, the Mexican peso closed with an appreciation of 1.45% or 29.3 cents, with the exchange rate going from 20.2462 at the end of April, to 19.9527 pesos per dollar today, the end of May.

In the accumulated of the year, this is equivalent to a minimum depreciation of 0.19 percent.

The main source of volatility in the month was speculation about the economic recovery in the United States, inflation and the effects this could have on the monetary stance of the Federal Reserve.

The mexican peso

Exchange rate performance can be divided into two stages:

First stage

In the first half of the month, the exchange rate showed upward pressure, after it began to speculate that the economic recovery has been sufficiently accelerated to generate inflationary pressures.

On May 12, inflation in the United States was published, corresponding to April, which significantly exceeded market expectations, reaching an interannual rate of 4.2% and a monthly rate of 0.8 percent.

Similarly, the Producer Price Index showed a monthly rise of 0.6%, which is equivalent to an annual producer inflation of 6.2 percent.

There were also some relevant comments from some members of the Fed and the Secretary of the Treasury, Janet Yellen, who were of the opinion that the central institution could begin to moderate its stance, which until now has been largely flexible to support the economic recovery.

During this period, the exchange rate peaked at $ 20.2135.

Second stage

Towards the second half of the month, speculation began to diminish that the Fed could abandon its flexible monetary stance, as more economic indicators were published that showed that the labor market is far from levels consistent with full employment.

Similarly, some members of the Fed said publicly that they expect inflation to be temporary, allowing the dollar index to continue weakening. In the month, the dollar weighted index fell 1.46 percent.

Other currencies

Thus, the dollar weakened against its main crosses, which caused that within the broad basket of main crosses, only 6 currencies lost ground: the Turkish lira (-2.30% monthly), the Chilean peso (-1.64%), the Peruvian sol (-1.35%), the Argentine peso (-1.19%), the Malaysian ringgit (-0.90%) and the Japanese yen (-0.20 percent).

The Turkish lira exchange rate reached an all-time high of 8.6134 lira per dollar, due to a loss of confidence in the country’s monetary policy.

Likewise, the Chilean peso was the second most depreciated currency, despite the fact that copper advanced more than 4% in the month, since on May 15 and 16 the election of the Constitutional Convention in charge of drafting the new constitution was held. starting in July, where the official right-wing coalition won only 37 out of 155 seats, so significant institutional changes are feared.

The Peruvian sol, like the Turkish lira, reached an all-time high of 3.8779 soles per dollar, given the uncertainty due to the presidential elections on June 6 in Peru, where preferences favor the leftist candidate.

Mexican economy and the peso

On the contrary, the currencies that led the gains were the South African rand (+ 5.48% monthly), which in the accumulated of the year is the most appreciated currency in the exchange market, the Hungarian forint (+ 5.46%), the real Brazilian (+ 4.07%) and the Polish zloty (+3.51 percent).

Going forward, the evolution of the labor market will be particularly relevant in the data to be published this week, especially in Germany and the United States, which publish their monthly employment reports on Wednesday and Friday respectively.

Likewise, the inflation data for the United States is considered relevant due to possible speculation regarding the monetary policy of the Federal Reserve.

For the Mexican economy, the result of the federal and local elections scheduled for Sunday, June 6, will be relevant.

In May, the euro hit a low of 1.1986 and a high of $ 1.2266 per euro. For its part, the euro peso touched a minimum of 23.9714 and a maximum of 24.4869 pesos per euro.

At the close, the interbank quotes for sale stood at 19.9528 pesos per dollar, 1.4206 dollars per pound and 1.2227 dollars per euro.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE