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MEXICO: SocGen Sees Banxico Cutting Faster Than Priced, Receives MXN TIIE 2y

MEXICO
EM BulletMexicoBulletEmerging Market NewsNorth America
  • SocGen has initiated a receiver position in MXN TIIE 2y, with an entry at 8.15%, target at 7.40%, and stop 8.40%. Their time horizon for the trade is six to nine months, with carry/roll averaging -6.7bp per month.
  • SocGen expects another 50bp Banxico rate cut to 9% this month, with the increasing possibility of another 50bp cut in May. They see the policy rate reaching 8% by end-2025, or lower, and 7% by end-2026.
  • The market is pricing an 8% terminal rate by end-2025, while a local survey anticipates a median of 8.25% by end-2025 and 7.5% by end-2026. Given the elevated real ex-ante rate of 5.6%, soft UST yields, weak USD and the Fed potentially cutting rates by 75bp or more this year, Banxico should have the flexibility needed to lower rates at a faster pace than the market is currently pricing in, in their view.
  • Rapidly softening domestic demand, limited external inflation pressures and low FX pass-through should also favour lower rates in Mexico. These factors will likely bring inflation expectations closer to the target in the coming months.
  • Risks to the trade include upside surprises to US and Mexico activity, high US tariffs being imposed on imports from Mexico regardless of the USMCA agreement, or sharp MXN weakness.
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  • SocGen has initiated a receiver position in MXN TIIE 2y, with an entry at 8.15%, target at 7.40%, and stop 8.40%. Their time horizon for the trade is six to nine months, with carry/roll averaging -6.7bp per month.
  • SocGen expects another 50bp Banxico rate cut to 9% this month, with the increasing possibility of another 50bp cut in May. They see the policy rate reaching 8% by end-2025, or lower, and 7% by end-2026.
  • The market is pricing an 8% terminal rate by end-2025, while a local survey anticipates a median of 8.25% by end-2025 and 7.5% by end-2026. Given the elevated real ex-ante rate of 5.6%, soft UST yields, weak USD and the Fed potentially cutting rates by 75bp or more this year, Banxico should have the flexibility needed to lower rates at a faster pace than the market is currently pricing in, in their view.
  • Rapidly softening domestic demand, limited external inflation pressures and low FX pass-through should also favour lower rates in Mexico. These factors will likely bring inflation expectations closer to the target in the coming months.
  • Risks to the trade include upside surprises to US and Mexico activity, high US tariffs being imposed on imports from Mexico regardless of the USMCA agreement, or sharp MXN weakness.