Definition and more doubts

On Wednesday, the President of the Republic, Andrés Manuel López Obrador, nominated the Undersecretary of Expenditures of the Ministry of Finance and Public Credit, Victoria Rodríguez Ceja to assume the position of governor of the Bank of Mexico, which need be said is of utmost relevance

The first thing that comes to mind is that maybe it wasn’t the best day. Inflation for the first half of November was published (0.69% q / q vs. 0.50% q / q market consensus). The annual rate was 7.05%, its highest level in 20 years.

It was highlighted that the pressure came from higher than expected increases in food prices and discounts for El Buen Fin, which were not enough. The increase in airfare prices was surprising.

In recent days the exchange rate of the peso against the dollar experienced an important rebound mainly motivated by the revaluation that the dollar has experienced against most of the currencies in the world; and in the background, due to the debacle of the Turkish lira, which once again activated hedging mechanisms against highly liquid prices such as the peso-dollar parity.

Likewise, long-term rate pressures have once again been felt in the United States.

Growth data in the United States contribute to the strengthening trend of the dollar. On the supply side, better production data were recorded.

Similarly, consumption rebounded significantly in October. In relation to a possible new wave of Covid-19, extended confinements were ruled out, but it was recommended not to put the issue aside, especially due to the impact of the virus during the cold season.

In a volatile and clearly complicated environment for inflation control, strong speculation arose about the nomination of the former Secretary of the Treasury as Governor of the Bank of Mexico. Yesterday the President nominated Undersecretary Victoria Rodríguez Ceja for such a position, which, needless to say, is extremely relevant.

The reaction in the markets was not very pleasant. The same exchange rate hit a relevant jump to levels of 21.60 pesos, almost a 1.5% devaluation compared to the previous day; long-term interest rates in the morning showed strong increases between 15 and 20 basis points.

Although an overreaction was evident, the return at the end of the day was not so strong. Rates remain at very high levels and the exchange rate barely managed to recover about 20 cents.

The first statements of the official nominated to govern Banxico make sense: respect autonomy, fight inflation, “do not touch” international reserves.

But among both national and global investors there are perhaps more doubts than there were a week ago regarding future monetary policy decisions.

Technical capabilities are not in doubt, but experience is commented on. Is the relaxation bias underpinned or is it kept tight?

If we judge by what we have seen this year, this Governing Board has paid dearly for its learning curve; With its new composition, it seems that this curve continues its course and this is clearly reflected in the premium that must be paid for the noise generated by the changes inside and the still radical positions of some of the members.

Where do we see it? In the difference between long-term interest rates (Treasury bonds vs 10-year M bonds), which at the beginning of the year was 460 basis points and at the close of yesterday was 609 basis points.

Again, it doesn’t seem like the best time to pay that price. 2022 looks to be a complicated year for monetary policy in the world and Mexico will be no exception.

Controlling inflation, stabilizing the variables will be a tough task. Hopefully there will be a greater determination in that sense and the new members of the Board show a quick adaptation.

Rodolfo Campuzano Meza is CEO of Invex Operadora de Sociedades de Inversión.

Twitter: @invexbanco

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