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Barclays Expect Curve To Steepen Following Banxico, Stay Constructive On MXN

MEXICO
  • Banxico surprised the market with a dovish statement, essentially mirroring the Fed's more dovish tone at the November meeting, with Powell signaling to markets that he wants to be done. Authorities now signaled that rates will remain at current levels for “some time” as opposed to “for a prolonged time.”
  • The board also acknowledged progress in the disinflation process, removing the message pointing to concerns regarding the stickiness of services and revising down its near-term inflation forecasts, adding to the dovish tweaks.
  • Barclays expect the curve to steepen (eg, 1s10s), as the market prices the next meetings as live, with a greater probability of earlier cuts, in line with their economists' view that the first cut could materialize in March. This dovish shift suggests that the board is unlikely to hike if the Fed hikes and is more comfortable with the current monetary stance. Thus, the probability of hikes should remain priced out.
  • USDMXN responded to the statement with a sharp move higher, underperforming its peers as the market repriced earlier chances of carry erosion. That said, Barclays don’t see this as an inflection point for the MXN, as the board did not signal imminent cuts, carry remains favorable relative to peers, and the fundamental story has not changed. Thus, Barclays stay constructive on the MXN versus its EM peers.
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