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Commerzbank Say MXN & BRL Likely To Remain Attractive

  • Fundamentally, July has so far confirmed that the Brazilian real and the Mexican peso are comfortable at their strong levels against the dollar for the time being. Yesterday's mid-month inflation data from Mexico and todays from Brazil underscore why this is the case: the continued decline in inflation rates both demonstrates the success of monetary policy in containing inflation and justifies the interest rate cuts on the horizon.
  • The fact that rate cuts justify continued currency strength may seem odd at first. However, Commerzbank are convinced that the Brazilian and Mexican central banks will reduce their interest rates cautiously and only within reasonable limits for the time being, thus ensuring attractive real interest rates for a longer period of time, with less uncertainty about the immediate inflation outlook compared to other major currencies. The real and the peso are therefore likely to remain attractive.
  • However, Commerz believe that further appreciation potential is limited. This is supported by falling real interest rates going forward and idiosyncratic event risks in the coming year (general elections in Mexico and the end of BCB Governor Roberto Campos Neto's term.

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