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MEXICO: Barclays Says FX Risks May Delay Faster Easing

MEXICO
EM BulletMexicoBulletEmerging Market NewsNorth America
  • Barclays views yesterday’s Banxico minutes as quite dovish, with three out of five board members favouring an increase in the pace of cuts to 50bp. Nevertheless, US President-elect Trump’s policy announcements on January 20 and H1 January CPI will determine the ability of Banxico to increase the rhythm of cuts.
  • For now, Barclays sees little room for the market to price in more cuts (especially an acceleration in the pace of cutting), as the Fed will likely be a binding constraint for Banxico. Barclays sees only two additional 25bp Fed rate cuts in 2025. A shallow Fed cycle implies the return of the US rates constraint, making too much decoupling challenging in front-end rates.
  • Furthermore, FX risks are likely to remain elevated into Trump’s inauguration, in their view. Barclays estimates that a 10% tariff would lift USDMXN towards 21.70. Moreover, the potential shift to sectorial tariffs would hurt Mexico’s nearshoring story, with companies finding it more difficult to re-direct trade through Mexico. Barclays sees room for MXN weakness to resume and stay long USDMXN.
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  • Barclays views yesterday’s Banxico minutes as quite dovish, with three out of five board members favouring an increase in the pace of cuts to 50bp. Nevertheless, US President-elect Trump’s policy announcements on January 20 and H1 January CPI will determine the ability of Banxico to increase the rhythm of cuts.
  • For now, Barclays sees little room for the market to price in more cuts (especially an acceleration in the pace of cutting), as the Fed will likely be a binding constraint for Banxico. Barclays sees only two additional 25bp Fed rate cuts in 2025. A shallow Fed cycle implies the return of the US rates constraint, making too much decoupling challenging in front-end rates.
  • Furthermore, FX risks are likely to remain elevated into Trump’s inauguration, in their view. Barclays estimates that a 10% tariff would lift USDMXN towards 21.70. Moreover, the potential shift to sectorial tariffs would hurt Mexico’s nearshoring story, with companies finding it more difficult to re-direct trade through Mexico. Barclays sees room for MXN weakness to resume and stay long USDMXN.