On Thursday, the Bank of Mexico will decide on monetary policy. No change in rates is expected. The main base case for Rabobank analysts is that Banxico will cut rates in H2 but they continue to expect that slightly later in the year. They warn that the door is still open for a hike should the Mexican peso slump dramatically.
Key Quotes:
“We had been somewhat hesitant to call for aggressive rate cuts in Mexico this year as to our mind, Banxico has not turned as dovish as the market seems to imply. We would argue that the Bank actually left the door open for further tightening should extreme MXN weakness emerge. That being said, our base case is that Banxico will cut rates in H2 but we continue to expect a move slightly later in the year than the summer move implied by the curve.”
“Banxico is in a tricky situation with activity slowing far more rapidly than core inflation. Adding to the mix is a currency that we would argue is primarily being supported by favourable carry. If the Bank cuts rates too quickly it risks triggering outflows, MXN depreciation, and in turn higher inflation down the line. That said, MXN is still the most attractive carry currency globally when adjusting for volatility and liquidity and even with 50bp of cuts, MXN would still have the gold medal around its neck so we would argue that there is still room for some easing without concerns on that front. However, that isn’t to say we think the risk of outflows is negligible, in fact, quite the opposite, but, it isn’t likely to be monetary policy that would trigger an exodus of foreign investors, instead that would be more likely to emerge from the fiscal side as the new administration finds its path.”
“Political policy uncertainty has been firmly on Banxico’s radar with the last statement containing a somewhat unusual number of references to potential risks stemming from the budget. We have already seen rating agency downgrades and there is the potential for more. We actually see around a 33% chane of another downgrade this year. Pemex is of course key here.”
“The central bank is not the only Mexican entity facing difficult decisions this year as the government must balance try and support Pemex in order to ensure fiscal stability from revenues which account for 15-20% of Mexico’s budget, while ensuring that those same measures don’t result in too much fiscal slippage which will endanger the budget from the spending side!”
“We expect USD/MXN to continue trading an 18.88 to 19.50 range in the next 1-3 months.”
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