Banxico Preview: Greater than expected cut to hinder temporary the peso – TDS

Economists at TD Securities have changed the call for Banxico at the September meeting to a 25bp cut (previously 50bps), while leaving a 25bp cut at the following two meetings unchanged. A greater than expected cut may hinder the peso, but they expect any such effect to be temporary. USD/MXN has been falling constantly since the beginning of August, accelerating after breaking 21.50.

Key quotes

“Banxico is faced with a difficult decision given the short term supply shock-driven inflation impulse, which is playing against a backdrop of the worst recession in modern history. We have changed our call for Banxico to now ease by 25bps (50bps previously), but retain the view that there will be two more 25bp rate cuts remaining in the current easing cycle.”

“We see relative hawkishness, within an environment of easing, underpinning the carry support for MXN. The market positioning implied by rates, as well as FX, suggests a muted reaction to a rate cut, though a greater than 25bp cut may drive knee-jerk (but short-lived) weakness.”