Commerzbank strategist Michael Pfister argues that Banxico’s recent rate cuts were broadly justified by moderating inflation and Mexico’s weakening economy, leaving little reason for the central bank to tighten policy despite markets pricing in roughly three rate hikes. Although the eventual removal of those expectations could weigh on the peso, Pfister expects weaker US Dollar conditions, robust US growth and resilient Mexican exports to provide offsetting support. Commerzbank has therefore revised its USD/MXN forecasts slightly lower across the forecast horizon.

Banxico caution and US support for MXN

"In the months following the outbreak of war in Iran, the peso suffered due to Mexican monetary policy. This has changed and the market is now pricing in interest rate hikes. What is being overlooked, though, is that the conditions for monetary tightening are not in place."

"But the market now seems convinced that Banxico will soon tighten its monetary policy. Roughly three interest rate hikes of 25 basis points are priced in over the next twelve months, and at times the market has priced in significantly more."

"Neither the current inflation figures nor the struggling real economy provide grounds for a change in monetary policy. Instead, Banxico is likely to keep interest rates unchanged for the foreseeable future."

"Help for the peso could, however, come from the US. The market is currently anticipating a few basis points of interest rate hikes by the Fed. We consider this to be unjustified, given the political pressure for interest rate cuts."

"Pricing out these expectations is therefore likely to lead to a weaker USD and consequently lower USD/MXN exchange rates. We have therefore revised our USD/MXN forecast downwards across the entire forecast horizon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)