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MEXICO: Deutsche Bank See Sequence Of Consecutive 25bp Cuts

MEXICO
EM BulletMexicoBulletGlobalEmerging Market NewsRegion
  • In Deutsche Bank’s view, the tweak to the forward guidance signals that Banxico is now engaged in a normalisation cycle rather than a recalibration of monetary conditions. Going forward, their central scenario envisages a sequence of consecutive 25bp cuts per meeting, with the policy rate closing this year at 10%, 2025 at 8% and 2026 at 6.5%. Key risks to this stem from more severe MXN volatility amid the continued adoption of market unfriendly reforms, additional 50bp Fed cuts, and a sharper deceleration of economic activity.
  • In DB’s view, yesterday’s cautious cut reveals Banxico’s preference for currency stability. With positioning now much lighter, DB expects Banxico to take a cautious approach, thus presenting a hefty interest rate cushion. In addition, valuation is now back to fair levels after a long span of very large overvaluation. Altogether, Fed support for the US economy and Banxico support for the peso suggest USD/MXN will move closer to 19.0.
  • On rates, DB believes that the monetary premium largely exceeds inflation and FX risks. On term premium, however, it is the lowest in EM, according to their estimation. Although the curve could be flatter for such levels of policy rates, the premium reflects fiscal uncertainty. Therefore, DB prefer to concentrate receivers in the shorter end of the curve (receiving 1Y1Y MXN vs. US) rather than extending duration, since they expect bull-steepening as the cycle continues.
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  • In Deutsche Bank’s view, the tweak to the forward guidance signals that Banxico is now engaged in a normalisation cycle rather than a recalibration of monetary conditions. Going forward, their central scenario envisages a sequence of consecutive 25bp cuts per meeting, with the policy rate closing this year at 10%, 2025 at 8% and 2026 at 6.5%. Key risks to this stem from more severe MXN volatility amid the continued adoption of market unfriendly reforms, additional 50bp Fed cuts, and a sharper deceleration of economic activity.
  • In DB’s view, yesterday’s cautious cut reveals Banxico’s preference for currency stability. With positioning now much lighter, DB expects Banxico to take a cautious approach, thus presenting a hefty interest rate cushion. In addition, valuation is now back to fair levels after a long span of very large overvaluation. Altogether, Fed support for the US economy and Banxico support for the peso suggest USD/MXN will move closer to 19.0.
  • On rates, DB believes that the monetary premium largely exceeds inflation and FX risks. On term premium, however, it is the lowest in EM, according to their estimation. Although the curve could be flatter for such levels of policy rates, the premium reflects fiscal uncertainty. Therefore, DB prefer to concentrate receivers in the shorter end of the curve (receiving 1Y1Y MXN vs. US) rather than extending duration, since they expect bull-steepening as the cycle continues.