After the recent slide of the MXN, now analysts at Rabobank expect a Banxico to raise rates 25bp to 8.00% on Thursday. They see USD/MXN back below 20.00 on a one month basis if volatility subsides but they see risks tilted to the upside.
Key Quotes:
“We had expected Banxico to save some of its ammunition and potentially raise rates early next year but the recent additional leg higher in USD/MXN has now pushed the probability of a hike to over 50% and as such we have changed our forecast.”
“We do expect the market to give AMLO ‘another chance’ and we expect that as soon as volatility subsides, MXN will catch another bid driving USD/MXN sub-20 again. However,we maintain our more sceptical view on policy further out and we do expect to see fiscal slippage and a repricing in of higher risk premia in Mexican assets.”
“We cannot discuss USD/MXN and Banxico rate decisions without mentioning the Fed and on this topic our view is unchanged relative to October’s Banxico meeting. We expect the Fed to raise rates on two more occasion before the end of next year with 25bp hikes coming in December 2018 and March 2019. That said, we see the risk as being skewed to the upside with the potential for another hike in June 2019 as well. As a result of this additional tightening, we expect the US 2s10s yield curve to invert and we are now expecting a US recession in Fall of 2020 which will have significant ramifications for the Mexican economy ahead of AMLO’s planned midterm election in 2021. Although this is not the only reason, the risk to our Fed call is another factor driving the balance of risks facing our Banxico view.”
“Foreign investor fears of government policy missteps have risen but AMLO is likely to get ‘another chance’ and if volatility declines again we expect inflows to resume. That said, investors will react to any unorthodox policies and outflows could occur quickly and viciously. Furthermore, the general EM environment will be key and poses an additional risk to MXN performance.”
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