Ahead of Mexican prints on trade balance and current account balance is scheduled to be announced for today, unemployment rate on 27th, inflation report on June 9th.
This is Banxico’s reaction function, the central bank stated previously that they will match Fed rate hikes with hikes of their own. Therefore markets initially priced in one rate hike by year end, bringing base rates to 4%.
However markets have since partially re-priced the Fed and now 2 Yr. MXN swaps trade at levels around 5.1%, which is well a 100 bps of rate hikes from current levels.
Hence, we emphasize on two scenarios: Either Banxico follow the Fed’s lead or Banxico is forced to make an emergency rate hike due to severe MXN depreciation, which could easily manifest due to oil price and EM developments.
We reckon that Banxico would likely arbitrate via emergency rate hikes, if necessary, rather than through direct FX interventions.
FX interventions merely serve to slow the speed and pace of a depreciation but they rarely change the broader trend. So, in a sense spending precious FX reserves on what is a futile measure is hardly an intelligent means of conducting monetary policy.
More to the point, Mexican FX reserves are not infinite and short term debts are high relative to FX reserves. Put simply, there is only so much that Banxico can spend on interventions to prop up MXN.
In sum risks are increasing for further MXN weakness and a move higher towards 19.50 cannot be ruled out in the short term.
Despite all the above mentioned data events, in OTC we observed phenomenal shrink in USDMXN IVs of 1w expiries, and you can even make out reducing vols even in various OTM and ITM strikes.
The material has been provided by InstaForex Company – www.instaforex.com