At today’s monetary policy meeting, Mexico’s central bank is expected to hold its overnight rate at 7.50%, maintaining a hawkish stance though. Currently given at 9-year high, Mexican key rate steep rise in the last two years continued amid increasing concerns with regard to swelling inflation and North American Free Trade Agreement (NAFTA) reconsiderations. Indeed, starting from 2016, consumer prices rose from 2.61% to 4.55% on year-to-year basis, putting Bank of Mexico’s 3% inflation target far off the mark.
Looking at the broader picture however, inflation eased quite significantly, decreasing from 6.80% (y/y) in December 2017 (16 years high) to 4.55% in April, a rather encouraging trend for the Mexican monetary authority who’s been struggling for a long time to stabilize this situation.
Accordingly, despite an inflation rate above the target, we would rather favor an unchanged interest rates scenario due to current interest rate levels and higher-than-expected slowdown in inflation rate since the beginning of the year, though continued weakness on the peso could be a hurdle if the greenback would be gaining ground.
As NAFTA talks seem to converge toward an encouraging outcome, we would expect the Mexican peso to regain strength in the near term. Strongly depreciating since mid-April 2018 (+8.25%) and almost flat since the beginning of the year (-0.69%), USD/MXN is currently weakening as May monetary policy meeting approaches. We suspect however tonight’s decision to have a rather subdued impact on the FX market in the short-term. Currently trading at 19.52, the pair is expected to decline further, heading along the 19.50 range in the short-term.
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