Banxico Preview: No Reason Now – Rabobank
Christian Lawrence, Senior Market Strategist at Rabobank, suggests that
when Banxico moved between meetings, price action was in a very
different place to where it is now.
“That was just after the trough of the Jan-Feb sell-off and USD/MXN was at 18.94 having rallied nearly 12% since the start of the year alone. We had clear signs that inflation had already bottomed out and was heading higher. Fast forward to the present day and USD/MXN is 10% off the February 11th peak, while inflation has come off the February highs and price pressures are already showing some signs of easing. In short, there is no immediate need for a rate hike.
Looking north of the border, the Fed still matters for Banxico policy. We fully expect Banxico to follow the US if the Fed raises rates and so our base case is for two 25bp rate hikes in Mexico this year. That said, we are also aware that Banxico has a somewhat pre-emptive reaction function that will see them err on the side of caution when it comes to potential shocks.
Furthermore, the Bank has been clear in its view that interest rate hikes are a preferred tool over FX intervention and should we see a sell-off like in January then there would be significant risk of another Banxico rate hike. Given that, we see the risk as firmly skewed to the upside when it comes to our base case of two 25bp hikes and potentially 100bp could easily be plausible, particularly given that we are expecting MXN weakness (driven by global sentiment souring and MXN’s high beta profile) going forward.
Returning to the domestic picture, the room to hike is obviously dependent on inflation. This has clearly bottomed out having previously been suppressed by limited pass-through from non-tradeable goods and the one off impact of some structural reforms at the back end of last year but we do not see excessive upward price pressures likely to force the Bank’s hand anytime soon.
March’s CPI inflation data saw a contraction in furniture and food, beverages and tobacco categories which is interesting given we haven’t seen a negative print in these two components since May 2015 and we expect this to be unwound in April but our expectation is for a steady print of 2.6% y/y in April.”