Mexican: Central bank likely to cut and retain a cautious tone – TDS

According to analysts from TDS, the Bank of Mexico will cut its rate by 25bps on Thursday. They expect it to retain a cautious tone on the pace of easing. Regarding the Mexican Peso, they see it may be vulnerable to easing should Banxico's tone sound overly dovish, though this will also be dependent on broad market conditions and US Dollar strength.

Key Quotes: 

“We see some risk that the market's pricing trajectory for Banxico may be overly aggressive in the near term, but this remains dependent on the flexibility provided by the Fed's easing path.”

“MXN performance has been stable relative to market-based valuation metrics, though the peso is now testing the best valuation levels since May, thanks to the impact of easing U.S. interest rates on general market volatility, as well as the high yield in both relative and absolute terms offered by MXN. This risks being threatened to some degree should we see yield differentials between Mexican and U.S. policy rates and longer-term fixed income deteriorate too quickly, a key constraint for Banxico. This has relevance in terms of levels of general volatility in the currency, which has been elevated in August but remains below levels of late 2018, providing Banxico with space to follow the Fed at the September meeting.”

“The Mexico curve remains priced for easing over the next few meetings, deviating from our timing which is based on TD's Fed call (cut in September and November, but hold through the next two months before easing again in March). Thus we believe that there is little scope for the curve to be surprised by the meeting, and foresee Banxico's policy statement leaving general pricing unchanged with a neutral-sounding cut that preserves policy flexibility on the timing of future easing. For the time being, cuts of 50bps are too "risky" for Banxico to consider, and would require a fundamental improvement in broad EM sentiment and/or substantial further easing in the U.S. curve.”