[SNE] The Volatility Set 2018 (first part)

The set of situations that cause variability in the economic and financial indicators, are very diverse and exert pressure on the indicators very different at different times, depending on their context.

Within the Volatility Set, we find emphatically for 2018, the following elements and context of time and influence, to damage a specific indicator, as it is the exchange rate of the peso against the US dollar, as a parameter for other Mexican indicators such as inflation, interest rate, investment, employment and economic growth, among other possible ones.

This article is divided into 3 papers, today Wednesday 1/10, tomorrow Thursday 1/11 and Friday 1/12.

- Monetary Policy Normalization. The US Federal Reserve, since 2008, has had extremely low target interest rates to strengthen the US economy. Apparently this has already been achieved to some extent and since December 2015 started raising and creating the objective of monetary policy   "normalization". The issue is that they must be careful not to do it in an accelerated way and overheat the economy, damaging it more than helping it. Therefore, the issue of gradualism in normalization, is that rates rise slowly.

As inflation becomes higher, the trend to raise the rate will be faster. This shortens the differential with the Mexican rate, that is, the risk premium to investors in Mexico, and causes the outflow of dollars, exerting depreciation pressure on the peso.

In 2018, there are decisions by the Fed on 1/31, 3/21, 5/2, 6/13, 8/1, 9/26, 11/8 and 12/19. In all these dates and then inflation is reported or other indicators that impact inflation, there will be pressure for this issue at the exchange rate. It is worth mentioning that it was probably the element that most affected the exchange rate in 2017, and is likely to remain among the most relevant in 2018.

- NAFTA. The treaty renegotiating that has helped Mexico diversify its economy and boost its export sector, logically generates uncertainty that causes volatility. The recurrent comment of the US government's interaction. of canceling the NAFTA, generates a lot of sorrow in Mexico and in the macro-financial indicators. In logical terms, it is unlikely that it will be canceled in reality. Even, it is not considered viable for the USA itself, but they certainly have legal authority and publicly exposed spirit. Therefore, regardless of the absolute termination of the treaty, the mere fact of generating comments by authorities on the subject causes volatility.

On each date close to, or in round of negotiations, it will always generate volatility. In 2018 at the end of January, the end of February and the end of March are the scheduled dates. But, with even anonymous topics like today's in US media, it obviously causes impacts, such as today's indicators such as the exchange rate.

Even if the US government exercises its right to call for cancellation, in its case a series of legal reactions will be initiated against it within the United States. Therefore, it is difficult for something to change this year, if there is no negotiation. But the uncertainty will persist and this generates the volatility itself.

...to be continued...