- Central bank boosted key borrowing cost to 11.25%, as expected
- Data-dependent language in statement seen as dovish by traders
According to Bloomberg article published on March 31, 2023, Wall Street is betting on the end of Banco de Mexico’s monetary tightening cycle, finding dovish clues in the central bank’s statement as it implemented an expected quarter-point interest-rate hike.
Analysts and swap-rate traders are ramping up bets that Thursday’s increase could be among the last after the board said it would “take into account the inflation outlook” in the future, signaling a more data-dependent approach. Mexico’s peso slipped against the US dollar, and the interest-rate swap curve, known as TIIE, sank.
Banxico raised its policy rate to 11.25% Thursday, marking the 15th straight increase and widening the gap with the US Federal Reserve’s 5% key borrowing rate.
“The base scenario of a strong peso due to rate differentials and foreign direct investment is still in force,” said Alfredo Puig, a trader at Mexican brokerage Vector in Monterrey, Mexico. “It is possible that the peso maintains its positive tone in the short term.”
Of course, exactly when Banxico will end its current cycle is far from certain. The statement published by the five-member board led by Governor Victoria Rodriguez left some ambiguity, saying that headline inflation decreased more than expected since the last meeting, in which traders were shocked by a larger-than-expected, half-point increase.
“We expect that Banxico will maintain a high reference rate for a prolonged period of time, so the rate differential and the conservative monetary policy should keep helping the stability of the peso,” said Pamela Diaz Loubet, a Mexico economist at BNP Paribas.
The Mexican peso fell in the wake of Banxico’s decision, heading for its first daily loss in six. Two-year interest-swaps slid 18 basis points, erasing earlier gains after the decision, as traders priced in a less-hawkish central bank going forward.
Here’s what others on Wall Street are saying.
More from Diaz Loubet at BNP:
While the deceleration of the US could have an impact of remittances and exports, “we think that the country’s fundamentals are solid, limiting the risks of a disorderly depreciation of the FX”
“This is, in our view, a pretty open statement in contrast to former ones, in which the board openly stated it would continue with more hikes”
“Banxico keeps the door open for either the end of the cycle or another hike in May”
Erick Martinez, a currency strategist at Barclays in New York:
- “The statement was broadly neutral but with a couple of dovish tilts: the board acknowledged that headline inflation has declined more than expected and the reference to ‘further hikes’ was removed, shifting to a data dependent stance. The market could see this changes as a signal that the end of the cycle is near, and will continue to trade the ‘peak rates’ theme”
- “We think this is a positive environment for rates, while the impact on the MXN could be limited as the currency still benefits from a comfortable rate differential”
Alejandro Cuadrado, global head of LatAm strategy at BBVA in New York:
- “If Banxico doesn’t surprise, it has no effect on the peso”
- “They don’t formally close the door but confirmed improved inflation behavior in the next couple of reads could end the cycle here”
Jaime Valdivia, chief economist at Galapagos Capital in Miami:
- “The peso will trade depending on global themes of risk appetite — not so much based on the interest-rate differential. We’ve reached the peak”
- “Policymakers will now keep tighter policy for some months and reduce it but in a very gradual manner”
- Expects Banxico to cut by 25 basis points in September
Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa:
- “The response was small and limited, which reflects that people saw this decision by the Banco de Mexico coming”
- “Since there’s no decision in April, I think markets will start paying slightly less attention to Banxico for now”
Joel Virgen Rojano, a strategist at TD Securities:
- “Banxico acknowledged that its monetary stance has reached a level congruent with the inflation converging to its target within its forecast horizon”
- “All in all, we think Banxico has reached terminal rate. Further actions are now data dependent, according to Banxico, but our inflation outlook is congruent with gradual decrease of core inflation in the following months”
- “Hence, we think this is the end of the hiking cycle”
