The peso is falling against the dollar for the third session: 19.92

The peso begins the session with an appreciation of 0.60% or 12 cents, trading around 19.92 pesos per dollar, with the exchange rate accumulating three consecutive sessions down.

In the last five sessions (taking into account last Friday) the peso accumulates an appreciation of 2.18% or 44.5 cents.

For now, in the session the exchange rate has traded at a minimum of 19.9196 and a maximum of 20.0577 pesos per dollar.

In the exchange market a weak dollar is observed, losing 0.13% and accumulating five consecutive sessions downwards, something that had not happened since mid-November 2020.

The main determinant of the weakness of the dollar continues to be the expectation of widely flexible monetary and fiscal policies in the United States.

In line with expectations, the dollar has continued to weaken after Federal Reserve Chairman Jerome Powell yesterday stressed the importance of providing more fiscal stimulus, especially due to the slow recovery that has been observed in the labor market.

The Fed chairman reiterated that full employment is still a long way off, so the Central Bank will continue to use all its tools to support economic recovery.

Likewise, Powell reiterated the importance of a flexible fiscal policy, adding that he sees no risk of inflationary pressures during the economic recovery process.

The peso

In the session, the performance of the exchange rate could be influenced by the monetary policy decision of Banco de México scheduled for 1:00 p.m., where the Governing Board is likely to cut the interest rate again by 25 points base at 4.00 percent.

However, a statement that signals caution cannot be ruled out, mainly due to the evidence of inflationary pressures during January, given monthly increases in the prices of gasoline and food merchandise.

Among the most appreciated currencies this morning, those of emerging economies or countries producing raw materials stand out.

The South African rand is the most appreciated currency with 0.88%, followed by the Brazilian real with 0.84%, the Chilean peso with 0.67%, the Mexican peso, the Turkish lira with 0.44% and the Russian ruble with 0.43%.

This behavior in the exchange market is not associated with gains in the raw materials market, where a mixed behavior is observed, with losses in energy prices.

The oil

The WTI starts the session with a decline of 0.84%, trading at 58.18 dollars per barrel, correcting part of the most recent gains, while industrial metals show moderate gains.

In the capital markets, gains are once again observed, mainly in Europe where the DAX index of Germany advances 0.58% and in the United States the futures market shows that new gains could be observed that take the main indices to new highs.

Pandemic

Regarding relevant news, in Mexico, Cofepris authorized the vaccine against Covid19, developed by CanSino Biologics in China.

This vaccine showed an effectiveness of 65.7% in the prevention of cases and of 90.9% in preventing serious cases, it highlights that this vaccine only requires the application of one dose.

Regarding economic indicators, in the United States in the week that ended on February 6, 793 thousand new applications for unemployment support were reported, decreasing by 19 thousand from the revised level of the previous week, although above 760 thousand expected by the market.

This is the fourth week in a row that initial applications have been reduced, in line with the decline in new Covid19 cases and the relaxation of restriction measures.

Continued applications for unemployment support, from those who are already receiving support or continue to wait, decreased from 4.69 to 4.54 million.

Industry

In Mexico, industrial activity showed a moderate growth at a monthly rate of 0.12% in December, thus it is 3.15% below the levels observed in December 2019.

Although the advance in the month has been the smallest since the reopening began in June, the data is better than expected, since during December an adverse environment related to the rebound of the pandemic was already perceived, which caused new restrictions in some states.

In 2020, industrial activity registered an average annual fall of 10.16%, being the second largest fall in record for a year, after 1995 with 10.77 percent.

It should be remembered that in 2020 the GDP contracted 8.5% compared to 2019.

Once again, the manufacturing sector has contributed to the monthly growth of industrial activity, since it represents 55.0% of it and advanced at a monthly rate of 1.07%, after the modest increase of 0.42% during November.

At an annual rate, manufactures grew 0.51%, the first growth after 14 months of consecutive falls.

It should be remembered that, during the strictest stage of confinement, May, manufacturing fell at an annual rate of 35.35 percent.

Peso and External sales

It is evident that the dynamism of manufacturing is due to external demand, since manufacturing exports closed the year with an annual growth of 8.84% in December, according to figures from the Trade Balance.

That is why in the data published this morning, within manufacturing, the sectors most sensitive to external demand showed solid growth rates in December, highlighting the manufacture of computer equipment (+ 9.45% annually), manufacture of accessories and electrical appliances (+6.57 per year) and transport equipment (+ 2.64% per year).

On the other hand, non-essential activities presented the greatest weakness, such as clothing (-24.14% annually) and tanning and finishing of leather and fur (-22.70% annually).

Likewise, the monthly advance of electric power generation stands out with 1.66%, although in annual terms it shows a contraction of 4.44%, spinning 10 months of setbacks.

In contrast, construction showed a monthly decrease of 2.70%, after two months of growth, evidencing the instability in its recovery.

In annual terms, it registered a contraction of 12.25% (Vs. -8.17% in November), accumulating 23 months of setbacks.

This sector has been seriously affected by weak domestic demand, restrictions on public spending and high uncertainty at the national level.

Mining

Finally, mining showed a slight monthly decline of 0.25% (-2.35% annually), dragged down by the sharp decrease in services related to mining with 7.09%, being the largest decline since July 2019.

Meanwhile, oil and gas extraction advanced slightly at a monthly rate of 0.19%, supported by the absence of meteorological events unlike the previous month.

During the session, the exchange rate is expected to trade between 19.83 and 20.06 pesos per dollar. The euro starts the session with an appreciation of 0.22%, trading at 1.2145 dollars per euro, while the pound gains 0.04% and is trading at 1.3840 dollars per pound.

The peso and the money and debt market

In the United States, the 10-year Treasury bond yield increased 1.9 basis points, to 1.14%, while in Mexico the 10-year M bond yield increased 1.2 basis points, at a rate of 5.69 percent.

Derivatives market

To hedge against a depreciation of the peso beyond 20.50 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.26% 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 19.9783 at 1 month, 20.3142 at 6 months and 20.7233 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE