Analysts at TDS, remain more aggressive than the market on an easing view, looking for Banxico to begin cuting rates in December. They see that without a NAFTA solution, MXN’s importance will be lessened and inflation expectations will be more important, which increasingly poses risk to the December rate cut forecast.
Key Quotes:
“We remain much more aggressive than the market on an easing view, looking for Banxico to begin cuts in Q4 (December) with a 25bp per meeting pace of easing. With election uncertainty now past, NAFTA remains the key restraint to Banxico, which will likely play out through the MXN and inflation expectations channels.”
“Inflation has been temporarily pushed higher by near-term non-core shocks (perishable food, gas). Core remains generally stable, and the Y/Y rate will only temporarily see upside. Thus Banxico should remain on hold so long as MXN-depreciatory shocks are absent. Medium to longer term inflation expectations remain elevated, despite nearer term expectations falling. As a result Banxico will be sensitized to MXN volatility as it substantially impacts future expectations.”
“MXN has outperformed the EM space since the election, as the resolution of political uncertainty, and constructive indications from AMLO, have been beneficial for sentiment.”
“Without resolution of NAFTA uncertainty, it is unlikely the peso’s value-proposition can be fully realized, as MXN sits just over 10% undervalued currently.”
Share
