The peso gains 4 cents against the dollar

According to the timely growth estimate, the Mexican economy contracted at a quarterly rate of 1.55% during the first quarter and an annual rate of 2.37%, according to seasonally adjusted figures, with the largest falls since the first and third quarters. 2009 respectively.

For purposes of comparison with the United States, the quarterly growth rate can be annualized, giving an annualized quarterly contraction of 6.20%. It should be added that this is the fifth consecutive quarter that GDP has contracted compared to the immediately previous quarter, something not seen in the INEGI series available since 1993.

Inside, it should be noted that secondary activities showed a quarterly contraction of 1.37%, accumulating 8 consecutive quarters of contraction, registering an annual fall of 3.75% according to seasonally adjusted figures, the deepest since the Great Recession of 2009.

Finally, tertiary activities contracted 1.40% quarterly and 1.44% annually, after showing positive but close to zero growth in the previous three quarters. The performance within the large groups of economic activity is not yet known, since this is the preliminary estimate. The final estimate will be released on May 26.

The peso and the economy

The peso begins the session with a moderate appreciation of 0.17% or 4 cents, trading around 23.70 pesos per dollar, since during the previous months the market has already been discounting the evidence of a severe economic recession, which began with a sustained drop in the investment in 2019 and that was deepened by the coronavirus crisis.

Other currencies in the basket of major crosses show gains against the dollar, although moderate compared to what was observed in the first three sessions of the week.

In capital markets, optimism seems to have ended in Europe, where there are losses on average of 1% in the main indexes, while in the United States the futures market points to an opening in negative territory.

This is mainly due to the publication in the Eurozone of the growth of the first quarter, where severe effects from the pandemic were observed.

The Eurozone contracted at a quarterly rate of 3.8%, that is, 15.2% annualized, being the largest drop in record since 1995.

The region contracted at an annual rate of 3.3%, a drop not seen since the third quarter of 2009, during the Great Recession. At the country level, it is worth noting that France’s GDP contracted 5.4% annually, that of Italy by 4.7%, Spain 4.1% and Austria 2.7%. Germany’s growth will be published until May 15.

Laboral sector

For its part, the United States published new applications for unemployment support received by the government in the previous week, which amounted to 3,839,000 units. With this data, in the last 6 weeks 30 million 301 thousand lost jobs have been accumulated.

In Mexico, markets are likely to continue to monitor economic developments as the most severe part of the impact of the pandemic has been during the second quarter. Likewise, the perception of risk on Mexico could continue, due to the absence of a countercyclical fiscal policy.

Another factor that could generate internal uncertainty is that the leader of the Morena caucus in the Chamber of Deputies has shown his support for the initiative to modify the Federal Budget and Fiscal Responsibility Law that President López Obrador sent to Congress last week.

With this modification, the president seeks to obtain the power to modify the budget in times of «economic emergencies» like the one we are experiencing now.

However, the initiative does not clearly define the concept of economic emergency, so it is expected that the necessary changes and specifications will be made to avoid giving full power over spending to the executive, and thus be able to maintain the controls and balances established in the Constitution.

During the session, an exchange rate is expected, trading between 23.50 and 24.00 pesos per dollar. The euro starts the session with little change compared to the close on Wednesday, trading at $ 1.0874 per euro, while the pound gains 0.31% and is trading at $ 1.2508 per pound

Money market

In the money market, the yield on 10-year Treasury bonds decreases 2.4 basis points to 0.60%, while in Mexico the yield on 10-year M bonds decreases 4.7 basis points, at a rate of 6.65 percent.

The peso and the derivatives market

To hedge against a depreciation of the peso beyond 25 pesos per dollar, a call option, with an exercise date within 1 month, has a premium of 1.61% and represents the right but not the obligation to buy dollars in the level mentioned above.

On the other hand, the interbank forward for sale is at 23.8676 at 1 month, 24.3639 at 6 months and 24.8601 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE