The peso strengthened after the reform’s approval to the Banxico Law was suspended and began the session with an appreciation of 0.29% or 5.7 cents, trading at around 19.86 pesos per dollar. 

MEXICO CITY (Banco Base) – The appreciation of the peso is due to three factors:

1. The market is anticipating that the Federal Reserve’s monetary policy announcement will show accommodative language. On this occasion, the Fed will also release an update to its economic projections at 1:00 p.m., followed by a press conference by Central Bank President Jerome Powell. The dollar’s weighted index begins the session with a 0.17% decline, losing ground for the third consecutive session. 

2. Optimism continues for the possible approval of a new fiscal stimulus in the United States. In the U.S. Congress, Democratic leaders Nancy Pelosi and Chuck Schumer held two rounds of negotiations on the stimulus package with Republican leaders Mitch McConnell and Kevin McCarthy. According to their testimonies, significant progress was made, but no agreement has yet been reached. The four leaders agree that the package should include funding for vaccines, support for small businesses, unemployment benefits, and education assistance. However, the controversial issue remains the support for state and local governments that Democrats want to include. An agreement is expected before the end of the week, and the FY2021 spending package must be approved before this Saturday to avoid a government shutdown.

3. A lower perception of relative risk concerning Mexico, after the discussion and approval of the Bank of Mexico Law reform, was postponed until 2021. It is worth mentioning that during the night, the exchange rate touched a minimum close to 19.82 pesos per dollar, which makes us think that the exchange rate could in the short term go to last week’s levels of 19.70 pesos. 

As for economic indicators, in Europe, the PMI for December was published early. The PMI Compound Index of Total Euro Zone Activity was 49.8 points, above the previous reading of 45.3 points. The services index also increased during December to 47.3, after the last reading of 41.7 points. Finally, the PMI manufacturing index stood at 55.5 points from 53.8 in November, recording a new high in the previous 31 months. Inland, new orders increased slightly, being its first advance since September. By country, Germany stands out, where the Total Activity Index registered an expansion for the sixth consecutive month, with its Composite PMI reading of 51.7 points. The publication of these indicators and their positive results have also generated optimism, mainly in the European capital markets, where the main indexes are advancing on average close to 0.65%, with the most significant advance registered by the German DAX, which is up 1.50%. 

In November, U.S. retail sales declined at a monthly rate of 1.1%, the second decline since April after October’s figure was revised from 0.3% to -0.1%. They increased at a rate of 4.1% in its annual variation, spinning five consecutive months of annual increases. In the interior, the most significant monthly contractions were observed in clothing and accessories (-6.8%) and in restaurants and bars (-4.0%), which indicates a deceleration in consumption due to the increase in cases of Covid19 and the hardening of confinement measures.

During the session, the exchange rate is expected to trade between 19.82 and 19.99 pesos per dollar. The euro begins the session with an appreciation of 0.27%, trading at 1.2184 dollars per euro, while the pound shows an appreciation of 0.47% and is trading at 1.3523 dollars per pound.

Money and Debt Market. 
In the United States, the yield on 10-year Treasury bonds increased by 3.2 basis points to 0.94%, while in Mexico, the yield on 10-year M bonds remained unchanged at 5.69%.

Derivatives Market. 
To cover the depreciation of the peso beyond 20.00 pesos per dollar, a call option, with an exercise date within one month, has a premium of 1.25% and represents the right but not the obligation to buy dollars at the level mentioned above.

On the other hand, the interbank forward for sale is at 19.9375 at one month, 20.2734 at six months, and 20.6954 pesos per dollar at one year.

 



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