MXN to face significant downside risks if Banxico keeps rates unchanged - TDS

According to analysts from TDS, the Mexican peso will be susceptible to a failure to hike from the Bank of Mexico tomorrow. They note also that if Banxico moves by 25bps with a hawkish message signaling a further hike, should have neutral currency impact.

Key Quotes: 

“We now expect that Banxico must return to interest rate hikes thanks to the confluence of politically driven MXN volatility, in the context of heightened (and deteriorating) inflation expectations. These factors are beginning to impact core aggregates which suggests the increased risk of second-round effects. We see two hikes of 25bps each at the November and December meetings.”

“There is upside risk to our rates call, given the substantial fiscal regime uncertainty introduced by the AMLO administration that will require additional risk premium to be priced-in to the currency and rates curve. We believe that MXN will depreciate further to push USDMXN to 21.25 and risk moving above, in line with a deterioration in the country's CDS and perceptions of its fiscal risk profile.”

“We see significant downside risk for the peso should Banxico not meet our (and market) expectation for a hike. Political risk concerns and the increased risk premium required by the market, particularly foreign investors, will need to come from MXN depreciation, if not realized by rates. We expect Banxico to adopt a more hawkish tone on inflation risks and peso stability, which should help calm the market.”

“We see consistency between our view on the next two meetings, and a risk premium for another 25bps hike priced-in to the TIIE curve into the new year. “