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Mexico’s central bank (Banxico) is expected to lower its policy rate by 50 basis points on Thursday, note TD Securities analysts and say that they see the bank emphasizing the large output gap with any hawkish tone focusing on inflation uncertainty.

Key quotes

“We believe that this will not be the last 50bp cut by Banxico, particularly given general peso stability.”

“Despite the substantial cumulative easing priced-in to 1yr rates in Mexico, the peso continues to provide one of the hightest 1-year implied returns in EM, lagging only ARS, TRY, and IDR.”

“With the market only pricing in 25bps less in easing than our view out to a year, and thanks to a substantial interest rate buffer to the USD, we believe there is little scope for MXN to be hampered by the cut, or by a more dovish sounding central bank.”