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Gustavo Rangel, LATAM Chief Economist, point out that the resolution of the NAFTA impasse should provide the Mexican central bank (Banxico) the final green-light needed to decouple its monetary policy decisions from the Federal Reserve on Thursday.  

Key Quotes:  

“A hawkish guidance to prevail in the nearer term Sunday’s announcement of a trilateral NAFTA agreement, now renamed US-Mexico-Canada Agreement (USMCA), had little impact on the Mexican peso, suggesting perhaps that financial markets had already priced-in such an outcome. The near-elimination of this crucial risk for the Mexican economy may have a more lasting impact on Banxico’s monetary policy guidance, however.”

“This improvement should be sufficient, in our opinion, to tip the balance in favour of no additional rate hikes in Thursday’s monetary policy meeting, with the policy rate kept at 7.75%.”

“Room for rate cuts is limited, but a dovish repricing is possible. Beyond this meeting Banxico should maintain a defensive (hawkish bias) in the near term, downplaying the risk of rate cuts. In other words, a “hawkish hold” is much more likely than an “all-clear” for rate cuts, but we see a greater a risk of a dovish repricing of the yield curve. Arguments relating to the upcoming changes in Banxico’s board, with the expected exit of a well-known policy hawk, could play a lasting role in market pricing.”

“Assuming that the US Fed should aim to hike its overnight rate towards 3%, we suspect the need to bolster FX stability should prevent Banxico from cutting rates below 6.5% over the next two years.”