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Banorte Expect MXN To Adopt More Defensive Stance As Banxico Pauses

MEXICO
  • Banorte expect Banxico to pause its easing cycle tomorrow and keep the policy rate unchanged at 11.0%. Further ahead, they expect a cumulative 100bp of cuts for the remainder of the year, bringing the reference rate to 10.0% at year-end.
  • In terms of strategy, with the local curve pricing-in around 70bp of cuts this year, Banorte consider that the scope for further nominal rate appreciation following the recent adjustment could be limited. Likewise, the negative carry in receiver positions discourages directional strategies. Banorte wait for better entries, favouring RV strategies biased towards a steeper curve. They also still prefer nominal versus real rates amid the seasonally low inflation period.
  • In currencies, they expect MXN to adopt a more defensive stance near term, supported by expectations for Banxico and the Fed, which should ensure that carry remains attractive to other EM FX that has also benefited recently from the stabilisation of implied volatility. As the month progresses, they see prospects for increased demand for hedging needs, as the presidential election approaches. They view tactical USD longs at USDMXN 16.70 as attractive, with shorts on EURMXN upon revisiting 18.60.
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