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.
Key Quotes
“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.”
