The peso began the session with a depreciation of 0.66%, or 11.3 centavos, trading around 17.34 pesos per dollar, with the exchange rate reaching a low of 17.2256 and a high of 17.3913 pesos per dollar, a level not seen since February 6.
The peso’s depreciation is due to increased risk aversion in the global financial market, following early Saturday morning’s US and Israeli attacks on Iranian military targets. The attack resulted in the death of Ayatollah Ali Khamenei, along with other high-ranking members of the Iranian government. Iran responded by launching missile and drone attacks against Israel and US military bases in the region. The countries targeted were Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, and Bahrain. Israeli airstrikes were also reported in Lebanon in response to attacks by Hezbollah.
Donald Trump has indicated that the military offensive against Iran, which extended over the weekend, could continue for several weeks and has called on Iranian leaders to cease hostilities. Markets are reacting with risk aversion for the following reasons:
The conflict in the Middle East has reached new proportions, and there is no clarity on when it might end. This implies the risk of it becoming a protracted regional war.
The Middle East produces around 30% of the world’s crude oil, so the conflict is creating disruptions in global energy supply chains. This, in turn, is generating upward pressure on energy prices, which could translate into higher global inflation, preventing central banks, such as the Federal Reserve, from continuing to cut interest rates.
In the face of uncertainty, the market typically shows an initial reaction of fear, even without clarity on the economic impact. This is most evident in the equity markets, where the week is starting with losses, particularly in Europe and the United States.
It’s important to note that the Mexican peso is not among the most depreciated currencies. However, it is prone to losses because it is an emerging market currency and widely used for speculation. Furthermore, in recent weeks the market has reduced its bets on an appreciation. In the week between Wednesday, February 18, and Tuesday, February 24, net speculative positions anticipating an appreciation of the peso in the Chicago futures market decreased by 1.48%, or 1,242 contracts, to 82,880 contracts, each worth 500,000 pesos—its lowest level since October 28, 2015. This marks five consecutive weeks of declining net positions in favor of the peso, accumulating a drop of 22.65%, or 24,273 contracts.
Meanwhile, the equity market is showing widespread losses. In the Asian session, Japan’s Nikkei fell 1.35%, snapping a four-session winning streak. Hong Kong’s Hang Seng dropped 2.14%, its biggest decline since February 2nd of this year. In Europe, the STOXX 600 declined 1.76%, after reaching a new all-time high on Friday. Within the index, 10 of the 11 sectors posted losses, most notably consumer discretionary (-3.70%), financials (-2.83%), and information technology (-2.38%). The only sector to gain was energy, rising 3.71% on the back of higher oil prices. Among other indices, Germany’s DAX fell 2.24%, France’s CAC 40 dropped 1.95%, and London’s FTSE 100 lost 1.21%. In the United States, on the futures market, the Dow Jones is down 1.11%, the Nasdaq 100 is down 1.42%, and the S&P 500 is down 1.09%.
Meanwhile, the commodities market is seeing almost across-the-board gains. The market has favored buying precious metals, as they are considered safe-haven assets.
Gold opened trading at $5,397 per ounce, up 2.23% and reaching a high of $5,419 per ounce, a level not seen since January 30. Gold reached an all-time high of $5,595.47 on January 29. Thus, gold has gained in eight of the last nine trading sessions, accumulating a 10.64% increase.
Silver opened trading at $95.24 per ounce, up 1.54%, and reached a high of $99.69 per ounce, a level not seen since January 30. With this gain, silver has risen in seven of the last nine sessions, accumulating a 29.50% increase.
Furthermore, they identify security as a key social risk for Mexico and a constraint on economic growth, as it increases costs for businesses. Illegal economic activity also weakens institutions through corruption and a greater risk that illicit financing could influence judicial candidates following the approval of the judicial reform. Regarding fiscal matters, increased spending pressures have led the government to reduce the security budget, but a renewed surge in violence could trigger a change of course, limiting fiscal consolidation. While higher levels of violence could have negative short-term effects, significant progress in security would be positive for the long-term rating. They note that misinformation surrounding the events of February 22nd is a risk that could increase social anxiety, complicate crisis management, and test communication capacity in similar events.
It is worth recalling that in the Bank of Mexico’s survey of private-sector economists, public insecurity is the main factor that respondents cite as hindering Mexico’s economic growth.
Money and Debt Markets
In the United States, the 10-year Treasury note yield rose 5.7 basis points to 3.99 percent.
Derivatives Market
To hedge against a depreciation of the peso beyond 19.50 pesos per dollar, a call option with an expiration date in one month has a premium of 0.59% and represents the right, but not the obligation, to buy dollars at the aforementioned level.
Meanwhile, the interbank forward rate is currently at 17.3721 pesos per dollar for one month, 17.5997 for six months, and 17.8995 for one year.
Source: realstatemarket
