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TD Securities on Banxico: Risk For Hiking Pace Acceleration

MEXICO
  • Inflation dynamics remain complex, as year-on-year inflation reads have all turned higher across headline and core price aggregates. This reflects still robust reads on underlying inflation momentum, particularly in core merchandise inflation.
  • Inflation expectations continue to face upwards pressure, with 1-year ahead expectations surging to the highest since early 2019, when rates were being increased at a rapid clip.
  • However, Banxico's decision is complicated by the still dovish stance of one member (Esquivel), generating some doubt in the market as to whether the central bank can remain sufficiently hawkish going into 2022 when the structure of the board changes.
  • On FX: MXN is now becoming challenged in terms of relative yield in the Latam space, thanks to a more rapid pace of rate hikes in Chile, Brazil, and Colombia. Furthermore, MXN's sensitivity to US yields is adding a challenge to the peso, as US short term yields remain volatile and face upside pressure. TD expect that the market would be substantially helped by a larger than 25bp rate hike, or at the least a unanimous decision on the rate hike.
  • On rates: The market is priced for a substantially extended Banxico hiking trajectory. TD believe that this is justified, however the degree to which this materializes in 2022 is in question. The new board composition will potentially inject a large degree of dovishness into the central bank, which could result in a bull-flattening focused on the long-end.
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