Mexico: A verbal warning shot to come from Banxico? - TDS

Sacha Tihanyi, Senior Emerging Markets Strategist at TDS, suggests that a negative output gap, tame inflation expectations, and weak external demand imply no pressing real economic reason for a hawkish Banxico.

Key Quotes

“However, comments from Governor Carstens, a spike in MXN volatility, and significant underperformance in the past few sessions suggests the potential for hawkish talk on the currency, or on rates as it relates to MXN stability.

The rate hike ‘premium’ over the Fed priced into the TIIE curve suggests market perception of significant risk that Banxico will be forced to hike to support MXN.

We expect the next rate hike in September, following the Fed’s next rate hike move.”