“They unanimously decided to vote for a 50 basis point hike, just to send the message that they have everything under control and are dealing with inflationary pressure with a firm hand,” commented Joel Virgen Rojano, strategist at TD Securities. “They send the signal that they don’t necessarily have to imitate the Federal Reserve.”
Before Thursday’s rate decision, Mexican swaps were pricing in a top terminal rate of around 11% and betting that Banxico would begin to ease monetary policy in the fourth quarter. Short-term swaps rose between 40 and 50 basis points after the latest increase, an indication that Mexico’s benchmark index could end up well above current levels. Swap traders have also ruled out the chances of rate cuts in 2023.
The peso rallied as much as 1.1% to its strongest level in about a week before paring its gains, though it posted the best performance among 23 emerging-market currencies tracked by Bloomberg.
Here are other comments heard on Wall Street:
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More from Virgen Rojano from TD
The monetary policy authorities “They are not comfortable with the recent performance of core inflation.”
“If you ask board members who have been open about this need to follow the Fed or copy the Fed at every step, they would say that Banxico’s reaction to Fed decisions is not robotic, it is not automatic. . And I think they’re right”.
“Business cycles are in different stages at this point. Real rate at different stage”.
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Erick Martinez Maganastrategist at Barclays in New York.
“We expect a flatter curve (bear flattening) and outperformance of the MXN”.
“It sends the signal that there is concern about the slow rate of disinflation, especially in the core component.”
“The market is incorporating increases in the following meetings.”
Gordian Kemen, Head of Emerging Markets Sovereign Strategy at Standard Chartered Bank.
The rise is “surprising and not discounted by the market.”
“There has been a pick up in core inflation in January, but I’m not sure this justifies another 50 basis point increase.”
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Luis Hurtado, currency strategist at the Canadian Imperial Bank of Commerce.
He expects the peso to strengthen to 18.5 to the dollar on the back of a dovish stance, strong trade and remittance data, and nearshoring-related flows.
Markets are likely to price in another 25 to 50 basis points in rate increases over the remainder of the tightening cycle.
Terminal rate forecast revised to 11.25% from 10.75%; anticipates that the rate will close 2023 at 11.25%.
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Alexander SquareHead of Global FX at BBVA New York
“Banxico’s extra hawkish tone, which surprised all analysts, is supportive for the MXN and the duration of the rates. It shows a bank with continued concerns about inflation, where actual readings have not helped and pushed their inflation forecasts higher, despite a stronger peso and other measures to give expectations some stability.”
“Banxico’s meetings do not usually have much impact since they have been quite predictable. But this broke the trend and suggests that the aggressive stance is even more entrenched and delays the prospects for easing.
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