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Banorte on Banxico Following Mexico inflation Data

MEXICO
  • Banorte expect Banxico to follow the Fed, at least for the rest of 2022. They reiterate their call of +75bps by Banxico on September 29th and a reference rate at 10.00% by the end of the year. On the former, they pencil-in this move as they expect the Fed to hike in the same magnitude on September 21st.
  • In this respect, Banorte note that Deputy Governor Jonathan Heath said late last week that this is the most likely scenario at least for the rest of the year, and that he would not even consider otherwise.
    • Although they identify him among the most hawkish members of the Board, Banorte think the majority could have a very similar rationale. Hence, they do not see Banxico as decoupling from the Fed anytime soon.
  • In terms of strategy, last Thursday Banorte recommended paying TIIE-IRS (26x1) and receive 2-year SOFR with an entry of 583bps, target of 620bps and stop-loss of 565bps (current: 598bps). The investment horizon is 3 months.
  • Banorte believe the strategy is attractive due to: (1) Market expectations of an eventual ‘decoupling’ between the monetary policy cycles of Banxico and the Fed, which they do not see; (2) additional room for further hikes in short-term rates relative to those currently discounted for both central banks; and (3) the spread between both securities has decreased significantly.
  • Furthermore, they see greater relative value in Mbonos vs Udibonos. The latter have become more expensive, considering a general increase in breakevens above the 12-month average. In particular, the 3-year reading stands at 4.97% from 4.67% at the beginning of the month.
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