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Barclays on Banxico - Debate Between Gradual And More Decisive Actions

  • The minutes maintained a similar tone versus the post-decision communique. There does not appear to be a strong commitment to maintaining a similar pace ahead, reiterating their rationale that the larger hike was decided “on this occasion”.
  • Barclays continue to expect Banxico to hike 25bp on February 10, but the outcome will depend on debate with the new Governor Victoria Rodriguez.
  • If she leans toward a 50bp hike, this might please market expectations. However, then it might be difficult to moderate expectations ahead and could lead sooner than expected toward more restrictive financial conditions amid a still-weak economic recovery.
  • On the other hand, if she supports a more gradual approach with a 25bp hike, this might be perceived as dovish by market participants. However, it is Barclays view that this could be overcome by stressing three issues: (1) It is highly likely that headline inflation has already peaked, according to the staff forecasts. The decline is even more evident in the newly released 3m/3m saar trajectory; (2) Banxico has already hiked 150bp in this cycle; and in this context (3) Banxico needs to leave space to adjust ahead and follow the US Fed, who Barclays believe will initiate lift-off in March
  • Barclays continue to see value in steepeners and remain paid the 2s5s TIIE spread, and tactically short USDMXN spot.

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