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“Mexico has been one of the hardest hit EMs during the recent rout in global bond markets,” notes Capital Economics’ Nikhil Sanghani. “The 10-year local currency government bond yield has jumped by almost 60bp to 6.30% this week. Meanwhile, the peso has dropped by around 2.5% against the dollar.”

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“We doubt that this trend will last. We expect that real yields in the US will edge lower and that global risk appetite will improve this year. These factors, alongside Mexico’s secure external position (the current account reached a huge 5.8% of GDP surplus in Q4), should support the peso.”

“There are three main reasons why we don’t expect the easing cycle to continue at the next meeting in March. First, the minutes to the 11th February meeting (released this week) were not particularly dovish, and suggest any additional easing will depend on the incoming data.”

“Second, and related, headline inflation rose to 3.8% in the first half of February and will jump above Banxico’s 2-4% target range in the coming months as fuel inflation surges. This may cause jitters at the central bank, as it did when the easing cycle was paused in November after headline inflation briefly surpassed 4%. And third, the recent volatility in financial markets will probably prompt a more cautious stance by Banxico. Accordingly, we think that the policy rate will remain at 4.00% next month. And, unlike most investors and analysts, we expect it to stay there over the coming years.”

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