Banxico hike rates by 50bps – meeting expectations – to 5.25% (the highest since 2009) in their first post-Trump statement. Warning that the Mexican economy "faces elevated uncertainty" hike for the fourth time, presumably in an effort to support the currency but fears that a more hawkish Fed will be more aggressive going forward sparked renewed selling in the Peso.
- *BANXICO: RISK OF CHANGE TO U.S. RELATIONSHIP IMPACTING MARKET
As Bloomberg reports,
Before the election, central bank Governor Agustin Carstens said he and the Finance Ministry had a contingency plan for panicked markets. So when Trump’s victory sent the peso plunging as much as 12 percent and Mexico’s government took no action, attention shifted to today’s meeting. Economists expect strong steps by Banxico amid concern Trump will curb free trade, which to Carstens would be a "hurricane" for a nation that sends almost 80 percent of its exports to the U.S.
The central bank’s “main target is to anchor inflation expectations, and most likely that will entail further hikes, potentially this year," even after today’s increase, Benito Berber, senior economist for Latin America at Nomura Holdings Inc., said before the decision. "Uncertainty over Nafta might not dissipate even after Trump assumes power and that could put a floor on the peso and could translate into significant pressures on inflation."
But the floor is being broken…
"The language will also be under intense scrutiny, especially with regards to the previous claim that Banxico would mirror the Fed’s tightening path," Deutsche Bank wrote in a note to clients. "Anything suggesting Banxico might opt to tighten more aggressively than the Fed would likely prove supportive for" the peso.
After the initial spike, it seems some confidence is coming back due to the statement's suggestion that "strengthenig of macro fundamentals are inevitable"
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