The peso begins the session with a depreciation of 0.45% or 9.1 cents, trading around 20.48 pesos per dollar, with the exchange rate touching a minimum of 20.3274 and a maximum of 20.6221 pesos, a level not seen since March 31.
In the foreign exchange market, a generalized strengthening of the US dollar is observed, with the weighted index showing an advance of 0.53% and gaining ground for the fifth consecutive session, in which it accumulates an increase of 2.04%.
The strength of the dollar is due to the monetary policy announcement of the Federal Reserve released yesterday afternoon and specifically to the upward adjustments in the expectations of economic growth (from 6.5 to 7.0% in 2021) and inflation (from 2.4 to 3.4%), sending a signal that now the members of the FOMC believe that there will be greater inflationary pressures, which could advance the process of normalization of monetary policy.
The market’s long-awaited dot plot showed that most FOMC members estimate the first interest rate increases in 2023 (from previous estimates pointing to 2024). All of the above is interpreted as an acknowledgment by the Fed that inflationary pressures could be non-transitory.
The mexican peso
Going forward, the performance of the exchange rate will depend mainly on speculation about the monetary policy of the United States and corrective movements.
The main determinant of this speculation will continue to be the publication of relevant economic information.
In the United States, the weekly employment report showed that initial applications for unemployment support increased by 37 thousand compared to the previous week, reaching 412 thousand units, above the market’s expectation of 360 thousand. This is the first increase after six consecutive contractions.
It should be remembered that, as of June 12, about five states stopped distributing federal unemployment benefits and it is expected that 20 more states will eliminate these additional benefits in the rest of the month, with the intention of motivating the job search.
On the other hand, continuous applications for unemployment support increased from 3,517 to 3,518 million people.
It is important to note that, in the foreign exchange market, the Mexican peso is ranked 13th among depreciated currencies, which confirms that the upward movement in the exchange rate is not due to internal factors.
The most depreciated currencies this morning are the South Korean won with 1.18%, the Hungarian forint with 1.05%, the Indian rupee that loses 1.01%, the Swedish krona with 0.91% and the Indonesian rupiah with 0.82%, all currencies for which already it was seeing low liquidity yesterday afternoon when the Fed’s announcement was released and its losses accentuated during the Asian and European sessions.
Few currencies are gaining ground, with only the Russian ruble standing out, advancing 0.28% and the Brazilian real with 0.12%.
The Brazilian real, which began operations at 7:00 a.m., could strengthen during the session after yesterday the Central Bank of Brazil raised the benchmark interest rate by 75 basis points to 4.25%, being the third increase in the year since a level of 2.0% at the beginning of March.
It is worth mentioning that the Bank of Brazil has indicated that it plans to continue with the cycle of interest rate increases during the year and has adjusted its inflation expectations for the end of 2021 up to 5.8%.
As of May, inflation in Brazil was 8.06%, well above the Central Bank’s target of 3.75% for this year.
Production in Mexico
Regarding economic indicators in Mexico, INEGI published the Timely Indicator of Economic Activity (IOAE), which anticipates an annual increase of 24.8% of the Global Indicator of Economic Activity (IGAE) for May, equivalent to a monthly advance 0.5% actual according to the published nowcast estimate.
It should be remembered that, in May 2020, the IGAE contracted 21.35% annually, so the significant annual growth is mainly due to the low comparison base. For secondary activities, an annual growth of 36.4% (monthly -0.2%) is estimated and for tertiary activities an annual advance of 19.8% (monthly 0.4 percent).
For its part, the IOAE for April was revised up to an annual increase of 21.6% (from 20.6%), which is equivalent to a real monthly increase of 0.4 percent.
The annual growth of tertiary activities in April was slightly revised from 16.4% to 16.3%, equivalent to a monthly advance of 0.3 percent.
Risks and Mexican peso
In May and June, conditions related to the pandemic continued to improve, as some capacity and schedule restrictions were lifted in businesses, especially in the services sector.
In addition, the vaccination process advanced at a faster rate from 9.7% of the population that had received at least one dose at the beginning of May, to 20.7% as of June 15.
Going forward, economic activity is expected to continue to be driven mainly by the reactivation of the services sector.
However, some risks prevail for the Mexican economy for the rest of the year, where the following stand out: 1) uncertainty in the face of unorthodox policies, 2) probable controversies regarding the USMCA and 3) probability that measures of confinement in the face of a coronavirus outbreak.
During the session, the exchange rate is expected to trade between 20.32 and 20.62 pesos per dollar.
The euro starts the session with a depreciation of 0.47%, trading at 1.1939 dollars per euro, while the pound loses 0.26%, settling at 1.3952 dollars per pound.
Money market and debt
In the United States, the 10-year Treasury bond yield decreases 1.5 basis points, to 1.56%, while in Mexico the 10-year M bond yield remains unchanged, at a rate of 6.77 percent.
To hedge against a depreciation of the peso beyond 20.70 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.75% 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 20.5652 at 1 month, 20.9398 at 6 months and 21.4466 pesos per dollar at one year.
Gabriela Siller; PhD
Director of Economic-Financial Analysis.