The peso stabilizes against the dollar and PMI advances in Europe

The peso starts the session unchanged from Friday’s close, trading around 20.25 pesos per dollar, with the exchange rate touching a low of 20.1923 and a high of 20.3171 pesos.

Optimism is observed in global financial markets due to the confirmation of a more accelerated economic recovery in Europe, after the final publication of the manufacturing PMI indicator for April at a level of 62.9 points.

Although the indicator was slightly below the preliminary data, it is its highest level on record, accumulating 10 consecutive months in expansion territory.

Inside, the Netherlands had the highest reading with 67.2 points, followed by Germany with 66.2 units.

At 8:45 a.m. the final data for the United States will be published and at 9:00 a.m. the ISM manufacturing indicator for the month of April will be published, which could also determine market sentiment for the rest of the session.

It is worth mentioning that during the Asian and European session, less liquidity has been observed, due to the fact that the financial markets have been closed in China, Japan and Thailand, as well as the United Kingdom in Europe.

This has caused that, in some markets, such as the exchange rate, a clear direction is not observed, with a strengthening of the dollar during Sunday night and a moderate weakening this morning.

The peso

The dollar weighted index begins the week with a 0.12% decline. In addition to the economic indicators published in the United States, the market will be attentive to a conference by the chairman of the Federal Reserve that will take place at 1:20 pm, on the subject of a fair economy.

For now, the publication of positive economic indicators and low liquidity allow gains in the European session, with the main indices advancing on average 0.81%, with Germany’s DAX advancing 0.78 percent.

Likewise, in the United States, the main indexes in the futures market point to gains at the open, with the S&P 500 advancing close to 0.50 percent.

There are still upside risks for the exchange rate during the week. Although the peso-dollar parity begins the session with few changes, during the overnight it reached a maximum of 20.3171 pesos not seen since April 6 and accumulates five sessions since the upward pressures were renewed on April 27.

Inflation and risk

The upward pressures for the exchange rate have two explanations that can occur simultaneously:

First

A strengthening of the US dollar due to the expectation of higher inflationary pressures in the United States.

Last week, the dollar weighted index strengthened close to 0.50%, something not seen since the end of March and the personal consumption price index for March showed an annual increase of 2.3%, which is consistent with the expectation of higher inflationary pressures.

Therefore, this morning there is a moderate increase of 1.6 basis points in the 10-year Treasury bond rate, standing at 1.64 percent.

If there is a more significant increase in the interest rate, the demand for dollars could rise, pushing the exchange rate up.

Second

A greater perception of risk with respect to Mexico.

Federal elections will be held in Mexico on June 6 and this has historically generated upward pressure on the exchange rate during the previous month.

For this reason, it is estimated that during May the exchange rate could reach a price between 20.50 and 20.70 pesos per dollar temporarily.

There is also the risk of observations for Mexico in trade matters by the United States.

Last week, the United States trade representative, Katherine Tai, said that in her country they have a series of concerns about Mexico’s handling of the USMCA obligations.

Tai did not rule out the possibility of using tools to enforce compliance with the treaty. The latter is the result of the modifications in Mexico to the regulatory framework of the energy sector, which makes it difficult for foreigners to participate and puts investments in the sector at risk.

Remittances and the peso

As for other economic indicators and publications, today at 9:00 am the remittances corresponding to March will be announced in Mexico, as well as the survey of specialists from the private sector of Banco de México.

At 12:00 hours the results of the IMEF manufacturing and non-manufacturing indicator will be published.

Today at 6:00 am the Business Confidence Indicator (ICE) for the month of April was published, which showed a reduction in pessimism in the four surveyed sectors (manufacturing, commerce, construction and services).

However, all sectors remain below the optimism threshold of 50 points.

The indicator that continues to lag the most is construction, registering a monthly advance of 0.8 points, standing at 46.1 points.

Pandemic

The monthly growth in business confidence may be the result of optimism regarding the decline in Covid cases in the country and progress in the vaccination campaign.

In general, the April figures were positive, showing less pessimism in all sectors.

The Global Indicator of Confidence Business Opinion, the weighted average of the indicators of the four sectors that comprise it, stood at 47.7, up 11.2 points compared to the same month of the previous year, according to original figures.

During the session, the exchange rate is expected to trade between 20.15 and 20.35 pesos per dollar.

The euro starts the session with an appreciation of 0.23%, trading at 1.2048 dollars per euro, while the pound advances 0.46% and is trading at 1.3886 dollars per pound.

Money market and debt

In the United States, the yield on 10-year Treasury bonds increases by 1.6 basis points, to 1.64%, while in Mexico the yield on 10-year M bonds increases by 2.9 basis points, at a rate of 6.94 percent .

Derivatives market and the peso

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 1.72% 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 20.3364 at 1 month, 20.6881 at 6 months and 21.1540 pesos per dollar at one year.

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE