News & analysis

Banxico kept rates on hold at 11.25% at its November meeting in line with consensus, our forecast, and its previous guidance that the current level of rates will need to be held for an “extended period”.

With the unanimous decision not coming as a surprise, the market-moving developments instead came from the forward guidance, where the MPC’s hawkish bias was dialled down at the margin. The MPC now judges that in order to secure convergence of inflation to the target, it will be necessarily to maintain the policy rate at its current level “for some time” as opposed to an “extended period” previously. Furthermore, the MPC openly acknowledged that there has been progress on the disinflation front, as highlighted in yesterday’s October CPI data, and now judges the inflation backdrop as “still challenging” rather than “very complex”. The final dovish development came from the removal of the phrase which emphasised the persistence in services inflation, suggesting that the MPC aren’t as concerned about this moving forward. This runs against our view that persistence in services inflation will be a headache for Banxico in the early stages of the easing cycle, largely because of tightness in the labour market and resilient growth conditions. While the monetary policy statement did mark a more dovish shift in tone, it didn’t read as outrightly dovish. Banxico retained its view that risks to inflation over the forecast horizon “remains biased to the upside”, while it also maintained its forecasts for headline and core inflation by end-2024 and through 3Q25, with convergence to the 3% target still expected by 2Q25.

Taken together, the statement read as a central bank that was priming markets for policy easing in early 2024, likely at the March meeting by our estimates, as opposed to joining peers in easing policy this year.

Given a more conservative easing cycle was also being priced by markets ahead of yesterday’s decision, and that path was also confirmed by the details of October’s CPI report, it was somewhat surprising to see USDMXN rally by 1.65% yesterday. However, the peso’s reaction reflects the fact that the marginal change in Banxico’s tone took place against another increase in longer-term Treasury yields, as opposed to more aggressive pricing of rate cuts by markets.

As such, we view the retracement in USDMXN as a trimming of recently re-engaged long carry positions, as opposed to an increase in outright bearish bets.

Overall, this price action is consistent with our November forecasts, where we expected markets to re-enter long LatAm carry trades, but with less purchase than earlier in 2023 given the increased levels of market volatility and risks.

USDMXN spikes on Banxico decision even as rate expectations remain largely unmoved

 

Author:

Simon Harvey, Head of FX Analysis

 

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