The Fed could be more aggressive in its monetary policy

The depreciation is mainly due to the expectation that the Federal Reserve (Fed) will adopt a tightening monetary stance at a more aggressive pace. Yesterday morning, the governor of the Fed, Lael Brainard, sent the signal that the increases in the rate may be greater than what was projected in the most recent expectations of the Federal Reserve itself and that she did not even rule out that it begin to reduce the Fed’s balance sheet at the May 4 meeting.

The foregoing strengthens the expectation that the next interest rate increase will be 50 basis points, pushing up interest rates on Treasury assets in the secondary market.

This morning, the 10-year Treasury note rate showed an increase of 9 basis points, reaching 2.64%, reaching a maximum of 2.6557%, a level not seen since March 2019. Expectations of higher interest rates in the United States tend to strengthen the dollar.

In the last two sessions, the depreciation of the peso (1.14%) is also due to a correction, after the market was unable to sustainly break through the support of 19.80 pesos per dollar for three consecutive sessions. Other currencies that have lost in the last two sessions are the Brazilian real with 1.53% and the Peruvian sol with 1.42%, which are located, like the Mexican peso, among the most appreciated currencies in the year, driven by higher prices of raw materials and its geographical distance from the conflict in Ukraine.

Losses are observed in the capital market, given the expectation of a more restrictive monetary stance in the United States. In the futures market, the Dow Jones shows a decline of 0.77%, while the S&P 500 loses 0.96% and the Nasdaq loses 1.59 percent.

Oil opens the session with gains as concerns about downside risks to supply outweighed concerns about downside risks to demand.

The administration of President Joe Biden is expected to announce new sanctions on Russia, in coordination with the G7 nations and the European Union.

The new sanctions package could ban all new investment in Russia and sanctions financial institutions as well as Russian state-owned companies. The UK also urged the G7 and NATO countries to agree on a timetable for phasing out oil and gas imports from Russia. Given this, the WTI begins the session trading at 103.50 dollars per barrel with an increase of 1.51 percent.

It is important to add that the Supreme Court postponed until Thursday the discussion of the reform to the Law of the Electricity Industry, where it will be defined if it is unconstitutional or not. The reform of the electricity industry continues to be a risk for Mexico’s investment and economic growth, but also for Mexico’s trade relations with the outside world. Yesterday, the United States trade representative, Katherine Tai, sent a letter expressing her concerns about the direction of the energy legislation and the risk it poses to American investments in the country. Likewise, she added that the energy sector is part of the T-MEC, this implies that there is a risk that the United States takes action against Mexico within the framework of the trade agreement, which can directly affect the economic recovery.

Regarding economic indicators, the monthly indicator of private consumption corresponding to January showed a monthly growth of 0.30%, rising for 7 consecutive months. During January, the growth of the indicator was driven by the monthly growth of 0.77% of services of national origin. With the observed monthly growth, private consumption is 7.27% above the same level of 2021 and manages to be almost at the same level observed before the start of the pandemic, since with respect to February 2020 it shows a lag of only 0.03%. . Although this is positive, private consumption is still below the maximum reached in July 2019, showing a lag of 0.80%. This lag is due to the fact that there is still no complete recovery in the consumption of national services, as of January it was 5.45% below its maximum on record reached in February 2020. During the coming months, the recovery of the service sector, which is driven by a recovery in mobility to pre-pandemic levels.

INEGI also published the figures for Gross Fixed Investment corresponding to January 2022, which show that in January it grew at a monthly rate of 2.20%, being the highest growth rate since July 2021. Comparing the figures with those of the same month last year, an annual growth rate of 8.42% was recorded. Against the pre-pandemic level of February 2020, a lag of only 0.66% is observed. However, compared to its maximum level reached in September 2015, the lag is 13.10%. Despite the recovery, the IFB except for 2020 is at the same levels as 2011.

For its part, the Automotive Registry of Light Vehicles for March showed that the month’s production stood at 305,976 units, presenting an annual growth of 0.81%, according to original figures. However, compared to its pre-pandemic level (March 2019), automotive production is 12.73% below. It is noteworthy that, during March, production was affected at the Volkswagen and Audi plants in Puebla, due to the shortage of semiconductors and electronic components. Meanwhile, General Motors in Coahuila faces a strike of approximately six weeks that began on March 26, due to the installation of new machinery and equipment in its production line. While this is not negative in the long run, it will affect April’s auto production. For their part, automotive exports stood at 262,494 units, the lowest level for a month of March (except 2021) since 2016. Exports show an annual growth of 2.49%. However, they present a lag of 19.41% compared to their pre-pandemic level (March 2019).

During the session, the exchange rate is expected to trade between 19.96 and 20.12 pesos per dollar. The euro appreciates 0.23%, trading at 1.0930 dollars per euro. For its part, the pound sterling appreciates 0.13%, trading at 1.3091 pounds per dollar.

Derivatives Market.

To hedge against a depreciation of the peso beyond 20.50 pesos per dollar, a call option with an exercise date within one month has a premium of 1.15% 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 20.1307 at one month, 20.7131 at 6 months and 21.4303 pesos per dollar at one year.

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