USD/MXN to move back to the 20.00 level as Banxico joins the hawk side – Rabobank

Banxico raised the policy rate 25bp to 4.75% as was widely expected by both traders and analysts alike. USD/MXN continues to trade north of resistance at 20.50 as US equities remain under pressure but economists at Rabobank foresee the pair trading back down to the 20 handle in the coming weeks.

CPI inflation forecasts revised higher

“Banxico increased the policy rate 25bp to 4.75% as was expected by traders and analysts.”

“2021 CPI inflation is now expected at 6.2%, up from the 5.7% projection back in August. Looking at the upward revision in inflation forecasts and the shift in voting pattern, it is easy to argue this meeting marks a step[up in hawkishness. We would agree, but there is an important caveat and that is the slowdown we are seeing in activity.”

“We have changed our forecast for further tightening and now expect two more 25bp rate hikes this year taking the policy rate up to 5.25% heading into 2022. We have left our terminal rate forecast unchanged at 6.00%.”

“Some of the downside in US equities is being directly driven by the increase in US rates as the mechanical impact of higher discount rates combined with the sensitivity of the growth and tech sectors pushes the S&P 500 lower. Meanwhile, higher US rates weigh on the attractiveness of MXN. That said, we expect to see another rally in risk which should push USD/MXN back to the 20 handle.”