USD/MXN: Banxico's hawkishness supports Peso, but market turmoil poses downside risks – Commerzbank

Banxico's determined stance in the fight against inflation supports the Peso. However, if the recent market turmoil weighs on the outlook for the US economy, economists at Commerzbank see downside risks for MXN due to Mexico's close ties with the US.

How much support will Banxico provide?

“As soon as inflation slowly approaches its target again, Banxico should have more room for rate cuts. Nevertheless, it will probably continue to secure an attractive real interest rate. By comparison, the Fed's rate cuts threaten to take more of a toll on monetary policy credibility, so we do not see the Peso at a disadvantage against the Dollar due to rate cuts.”

“There are, of course, major risks to our forecast from the recent market turmoil. Banxico does not see major contagion risks thanks to the good capitalization of the Mexican banking sector and intends to continue to focus on the fight against inflation. However, given the close linkages with the US, it would significantly weigh on the MXN outlook if the outlook for the US economy deteriorates.”

Source: Commerzbank Research