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Deutsche Bank Expects Heightened Volatility Through September, At Least

MEXICO
  • Deutsche Bank believes that recent statements from the president and president-elect suggest that the recent MXN sell-off is no impediment for them to proceed with reforms. This means that volatility will likely linger and bouts of positioning squaring will repeat. DB expects to see heightened volatility through September, at least, when it will be clearer how aggressive and effective the AMLO-New Congress combo will be in advancing the constitutional reforms.
  • DB finds MXN still overvalued, and the recent sell-off has erased about half of this. Still, part of the overvaluation reflects supportive factors, such as tight monetary policy and a favourable nearshoring narrative, which are unlikely to change. Therefore, DB expects USDMXN to stay below 20.0. In a stress scenario of diminished FX liquidity amid a knee-jerk reaction to a potential approval of reforms, Banxico could provide a backstop via FX intervention and even damage control rate hikes.
  • The outlook for rates will closely follow the FX path. If anything, this might keep Banxico on hold for longer, possibly the full year, despite ex-ante real rates being already very high. Mexico’s 5Y (risk-neutral) rate suggests a policy rate close to Brazil’s 5Y forwards, which exaggerate fiscal vulnerabilities. DB expects Banxico to be hawkish enough to anchor the long end of the curve, while uncertainty and tighter financial conditions amplify the already ongoing deceleration and disinflation – thus underpinning bear-flattening.
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