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4 May 2016
Mexico: No real economic reason for a hawkish Banxico - TDS
According to analysts from TDS, the Bank of Mexico will not raise rates tomorrow, but it will move in September, following the Federal Reserve rate hike.
Key Quotes:
“A negative output gap, tame inflation expectations, and weak external demand imply no pressing real economic reason for a hawkish Banxico.”
“Regardless of why Banxico cares about MXN volatility, the fact remains that policy makers do care, and the past couple of weeks of trading make this obvious. Indeed, two weeks ago Governor Carstens remarked in an interview that MXN was undervalued and had room to gain. It is highly unusual to hear an emerging market central bank governor sound bullish on their currency, outside of a period of adverse pressure, and so these comments are telling.”
“We expect the next rate hike in September, following the Fed’s next rate hike move.”
“We expect Banxico to remain on hold at 3.75%, given no real (domestic) economic reason to raise rates at this point.”
“The volatility of the past two sessions, combined with the Governor’s suggestion of MXN undervaluation, implies that the Banxico decision may be nuanced by rhetoric aimed at currency volatility. Market perception of the risk of MXN weakness has spiked significantly as the 25-delta risk-reversal for USDMXN is showing price behaviour unlike other high-beta EM currencies over the past two sessions. This may send a signal to Banxico that the market is showing some potential to become unhinged, and thus may require some official jaw-boning.”
Key Quotes:
“A negative output gap, tame inflation expectations, and weak external demand imply no pressing real economic reason for a hawkish Banxico.”
“Regardless of why Banxico cares about MXN volatility, the fact remains that policy makers do care, and the past couple of weeks of trading make this obvious. Indeed, two weeks ago Governor Carstens remarked in an interview that MXN was undervalued and had room to gain. It is highly unusual to hear an emerging market central bank governor sound bullish on their currency, outside of a period of adverse pressure, and so these comments are telling.”
“We expect the next rate hike in September, following the Fed’s next rate hike move.”
“We expect Banxico to remain on hold at 3.75%, given no real (domestic) economic reason to raise rates at this point.”
“The volatility of the past two sessions, combined with the Governor’s suggestion of MXN undervaluation, implies that the Banxico decision may be nuanced by rhetoric aimed at currency volatility. Market perception of the risk of MXN weakness has spiked significantly as the 25-delta risk-reversal for USDMXN is showing price behaviour unlike other high-beta EM currencies over the past two sessions. This may send a signal to Banxico that the market is showing some potential to become unhinged, and thus may require some official jaw-boning.”