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MEXICO: Morgan Stanley Says Case For Dovish Banxico Is Still Live

MEXICO
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  • Morgan Stanley notes that growth expectations for Mexico are starting to fall somewhat faster than those implied for the US. At the same time, inflation trends remain benign and core CPI expectations continue to fall. That said, valuations in TIIE have deteriorated quite a bit over the last few weeks, in their view, as the implied terminal rate differential between Mexico and the US has fallen below 500bp over a two-year horizon, wiping out all the post-election risk premia.
    • MS believes taking on additional front-end Mexico rates risk at current levels has become primarily a US rates beta play, in an environment where Mexico's investment narrative continues to deteriorate structurally, with the FX as the main release valve.
    • They also note that uncertainty around the outcome of the US election remains quite elevated and struggle to see how certain parts of the local swaps curve can continue to outperform relative to US rates (though they wouldn’t look to pay outright).
    • In TIIE, MS adds 2y1y payers vs 2y1y SOFR receivers, targeting 535bp. In MBonos, they believe that valuations vs the US look less compressed. They continue to favour the belly of the curve (5-yr space) and expect 5s30s to continue steepening. In FX, MS stays bearish on MXN and would look to fade any breaks in USD/MXN below 19.00.
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  • Morgan Stanley notes that growth expectations for Mexico are starting to fall somewhat faster than those implied for the US. At the same time, inflation trends remain benign and core CPI expectations continue to fall. That said, valuations in TIIE have deteriorated quite a bit over the last few weeks, in their view, as the implied terminal rate differential between Mexico and the US has fallen below 500bp over a two-year horizon, wiping out all the post-election risk premia.
    • MS believes taking on additional front-end Mexico rates risk at current levels has become primarily a US rates beta play, in an environment where Mexico's investment narrative continues to deteriorate structurally, with the FX as the main release valve.
    • They also note that uncertainty around the outcome of the US election remains quite elevated and struggle to see how certain parts of the local swaps curve can continue to outperform relative to US rates (though they wouldn’t look to pay outright).
    • In TIIE, MS adds 2y1y payers vs 2y1y SOFR receivers, targeting 535bp. In MBonos, they believe that valuations vs the US look less compressed. They continue to favour the belly of the curve (5-yr space) and expect 5s30s to continue steepening. In FX, MS stays bearish on MXN and would look to fade any breaks in USD/MXN below 19.00.