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Barclays Stay Received 2y2y TIIE And Short EURMXN

MEXICO
  • Following last week’s Banxico meeting, Barclays see scope for a March rate cut, noting the dovish tone of the accompanying policy statement. They believe that the board’s main focus is declining core inflation. Although inflation risks are still biased to the upside, Barclays do not believe a shift to neutral here is a requirement for rate cuts.
  • Barclays stay received 2y2y TIIE and short EURMXN into Banxico’s initial cut. They believe that MXN will be supported by a resilient US economy and still high carry, even after initial cuts. In their view this gives Banxico room to start easing soon even if Fed cuts are pushed back, and this will prompt the market to price in more front-loaded easing.
  • Although further US strength is a risk, Barclays believe that MXN will still outperform in such a scenario (as US strength spills over into Mexico) and that local yields will only see limited upside. Even if the US neutral rate has risen, they believe that Banxico’s neutral rate would still be close to the upper bound of its 1.8-3.4% forecast range, which implies that pricing for a terminal rate near 8% is still far too high.
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