In a highly anticipated event, Banxico meets today to set the policy rate. The vast majority of economists favour a 25bp rate cut taking the policy rate to 10.50%. However, financial markets price a 50% chance of a 50bp rate cut.

50% chance of a 50bp rate cut

“The thinking here is that Banxico, like the Fed, could deliver a precautionary large cut now that it has switched away from inflation and towards growth concerns. Additionally, some see this as a window of opportunity for a large cut before the US elections, and an uncertain future for trade policy closes the window for such a large reduction later this year.”

“At the same time, the peso remains vulnerable to the political story. After securing judicial reforms, the government is trying to push a large hike in the minimum wage through Congress. On the former, the rating agency Moody’s is now saying that the constitutional reforms could directly impact Mexico’s sovereign credit rating. Moody’s currently has Mexico at Baa2, (S&P at BBB) and Mexico’s five-year CDS at 120bp is already trading towards a one-notch downgrade.”

“We think Banxico could risk a 50bp rate cut today to ease high real rates quickly. However, the peso would suffer and our near-term bias for USD/MXN is 19.75 and above 20.00 should a 50bp cut be delivered today.”