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Banxico cut rates 50bp to 4.50% as was widely expected. Market reaction was fairly muted although MXN retraced some of the rally heading into the meeting and the front-end now prices in a much higher probability of a 50bp cut next month. USD/MXN is currently trading at 22.15 and economists at Rabobank think the peso will outperform most of its LatAm peers but USD/MXN is likely to hit the 24 handle again before the year is out.

Key quotes

“Banxico cut rates 50bp to 4.50% in a decision that was widely expected. In the aftermath of today’s meeting, the market moved to price in a greater chance of a 50bp cut in September and it is likely many more analysts will move into that camp as well. We maintain our view that we may see another 100bp of cuts this year and the statement allows us to have higher conviction about that call.”

“Even if our call for cuts down to 3.50% come to fruition, MXN would still be the most attractive carry currency when adjusting for liquidity and volatility.”

“We maintain the view that MXN is likely to outperform most of its LAtAm peers in the coming months but USD/MXN will trade back up to the 24 handle before the end of the year.”