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Neither aggressive hike can calm inflationary fears in Mexico

The surprising and audacious rate hike Mexico was not enough to convince investors that the central bank will be able to control the inflation. That should help the weight maintain its attractiveness.

The nation’s two-year breakeven remains above the official inflation target range of 2% to 4% even after Banxico, as the central bank is known, raised borrowing costs by half a percentage point on Thursday, plus of the 25 basis points that most economists expected.

The peso rallied, leading gains among emerging market currencies and topping its 50-day moving average against the US dollar as the decision caught some traders by surprise. Investors say the currency has more room to rise, while policymakers may have to implement even more hikes.

Mexico’s annual inflation hit a two-decade high of 7.37% last month, lower than the rate in Brazil, but higher than those observed in Chile, Peru and Colombia. The central bank expects it to converge to 3% in the fourth quarter of 2023, but two-year breakevens, the spread between nominal local debt and inflation-linked debt, remain close to 4.7%, showing that traders Any questions.

“The Mexican peso is like the S&P: impossible to go short,” said Sergio Zanini, partner and manager of Galapagos Capital in São Paulo. “Next year will be a challenge, as inflation will remain rigid and growth will also struggle, so there will be strong pressure to be very patient and try to avoid a bigger impact on the economy.”

Latin America has been affected by the rise in consumer prices that has prompted the region’s central banks to raise interest rates. In Brazil, where the most aggressive tightening cycle of 2021 has taken place, and sent the economy into a shallow recession, signs are emerging that price pressures are easing.

Mexico’s decision came a day after a “hawkish” turn from the Federal Reserve spurred a rally in riskier assets, as investors felt that a tightening of policy would not hamper economic growth.

This was the last meeting of Banxico under the direction of Alejandro Díaz de León, leaving the bank in a period of uncertainty. He will be replaced by the low-profile former undersecretary of expenditures, Victoria Rodríguez Ceja. His appointment last month caused the peso to crash to its lowest level against the dollar since March.

Mexico’s swap rate curve, known as TIIE, discounted a 25 basis point increase in December and an adjustment of about 200 basis points next year before Thursday’s hike. With the aggressive hike and more hawkish messages, swap rates are likely to rise further before the end of the year, discounting possibly even more increases in 2022.

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