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Morgan Stanley on Banxico: Maintain Preference For Front-End TIIE Payers

  • MS economists expect Banxico to hike rates by 50bp to 6.00% at the February 10 meeting, in line with Bloomberg consensus expectations and market pricing.
  • On the strategy side, MS maintain a preference for front-end TIIE payers (they like the 1-year, targeting 8.00%), as a play on ongoing FOMC front-loading risks, to which Banxico remains extremely sensitive.
  • More specifically, FOMC risks remain skewed towards the hawkish side and they think that the latest strong upside surprise in US payrolls (and any potential upside surprise in US CPI this week) are likely to fuel the market debate around a 50bp US hike in March (with 35bp already priced in). In turn, this should keep the pressure on front-end TIIE elevated and the flattening momentum strong.
  • MS saw yesterday’s CPI print as likely posing asymmetric risks for the market, as a downside surprise would likely put downward pressure on terminal rate expectations (currently at 7.75%), while an upside surprise would simply validate their expectation for 50bp at the coming meeting, with investors likely to remain focused on guidance.
  • MS will be keeping an eye on Governor Rodriguez's views on the appropriate balance between tackling inflationary pressures/responding to a hawkish FOMC and increasing growth concerns. They think that more hawkish communication from the governor in particularly would also create further pressures for the front end and boost expectations of Banxico front-loading.
  • In the meantime, Morgan Stanley also keep a bearish bias on MXN as valuations remain relatively expensive versus the rest of EM, but prefer to pair MXN shorts versus CLP.

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