The peso begins the session with a depreciation of 0.53% or 10.4 cents, trading around 19.87 pesos per dollar, being the second most depreciated currency in the exchange market in the face of a generalized strengthening of the US dollar, after last week the US currency reached minimum levels since 2018.
The strengthening of the dollar overnight was mainly driven by two pieces of news:
A trade agreement between the United Kingdom and the European Union was not reached over the weekend and a collapse of the talks is speculated.
Today during the day, the Prime Minister of the United Kingdom, Boris Johnson, will have a conversation with the President of the European Commission, Ursula von der Leyen, which will determine the future of the negotiations.
In the foreign exchange market, the pound sterling is the most depreciated currency, losing 1.21% against the dollar and trading at 1.3279 dollars per pound, being the largest daily fall of the pound since September 10.
It should be added that the movement is also part of a correction, as the pound had gained strength for five consecutive weeks, accumulating an appreciation of 3.08% in that period.
It is speculated that the United States could impose financial sanctions on about 12 Chinese officials for their intervention in the disqualification of members of Parliament in Hong Kong who were part of the opposition.
It is the first time since the beginning of the year that financial markets react negatively to the political tensions between the United States and China, which highlights two things: 1) the markets already see the coronavirus pandemic as an event that will be resolved in the short term as vaccines are distributed and 2) the news is primarily a pretext to make gains in the capital markets and adjust positions in the foreign exchange market.
The peso and the United States
In the capital market, the main indices in Europe show a generalized decline, on average close to 0.50%, while, in the United States, the futures market points to a downward opening, with losses close to 0.32%, after reaching new all-time highs in Friday’s session.
It is important to note that there could be new episodes of optimism related to the approval of stimuli in the United States during the week.
One of the Republican senators who back the proposal for the 908 billion dollar fiscal support, said yesterday that he is confident that President Donald Trump and Republican leader Mitch McConnell will join the plan.
In addition, he added that it is not a final stimulus package, but rather a relief package that will serve to support those most in need for the next three or four months. Details of the package are expected to be released today.
Regarding the economic indicators of Mexico, the Gross Fixed Investment (IFB) registered a decrease in real terms of 2.88% per month during September, being the first setback after four months of advances.
At an annual rate, investment shows a fall of 17.97%, spinning 20 months down, which represents the longest period on record.
The decline in investment is the result of a strong 5.83% monthly drop in investment in construction, with monthly decreases in both residential investment (8.92%) and non-residential (3.20%). Investment in construction is 18.33% below that observed in September 2019.
In contrast, investment in machinery and equipment extended its recovery by advancing 1.30% per month, accumulating four months of increases, although this has not been enough to offset the sharp fall in previous months, since at the annual rate it continues to show a significant contraction of 16.51 percent.
The figures show that at the end of the third quarter there was still no stable recovery in investment due to the high degree of uncertainty that prevails, due to the effects of the pandemic and internal factors.
With the falls in the IFB, long-term economic growth is limited, so it is likely that after the rebound effect of 2021, Mexico’s GDP will show annual growth rates of only 1.5%, contrasting with the 2.2% per year that it showed until 2018.
The Monthly Indicator of Private Consumption in the Internal Market for the month of September shows a real growth of 2.2% compared to the previous month, with which in annual terms the drop in consumption is located at 11.4 percent.
The monthly increase was mainly due to the increase in consumption of national services, which grew 4.7% in the month.
The services sector was driven by the relaxation of sanitary measures by consumers, given that in September there were still no signs of the coronavirus outbreak that is occurring today.
However, in annual terms the consumption of national services shows a contraction of 14.6 percent.
On the other hand, consumption of goods only increased 0.5% during the month, and in annual terms it shows a contraction of 9.9 percent.
Indicators of Banxico
On the other hand, the consumption of imported goods decreased 1.8% in the month, reaching an annual contraction of 23.6%. Consumption is estimated to show an average annual drop of 11% in 2020.
During the session, the exchange rate is expected to trade between 19.76 and 19.96 pesos per dollar. The euro starts the session with an appreciation of 0.09%, trading at 1.2132 dollars per euro, while the pound shows a depreciation of 1.09% and is trading at 1.3295 dollars per pound.
Money market and debt
In the United States, the yield on 10-year Treasury bonds decreases by 2.7 basis points, at a rate of 0.94%, while in Mexico the yield on 10-year M bonds increases by 1.6 basis points, at 5.72 percent .
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 1.91% 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 19.9044 at 1 month, 20.2275 at 6 months and 20.6500 pesos per dollar at one year.
Gabriela Siller; PhD
Director of Economic-Financial Analysis.