Mexico’s Excessive Inflation Opens Door to Extra Charge Hikes, Mexican Peso Outlook Brightens

KEY POINTS:

• Persistent excessive inflation in Mexico may lead Banxico to undertake an aggressive tightening cycle within the second half of the yr
• Markets count on two further 25bps price hikes in 2021, though traders are beginning to worth in a 3rd one
• Tighter financial coverage by Banxico may benefit the Mexican peso towards the U.S. greenback

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Earlier today I wrote about inflation in Mexico following the discharge of the newest knowledge from INEGI. June headline CPI eased barely to five.88% y/y from 5.89% y/y in Could and remained considerably above the higher restrict of the central financial institution’s goal (as a reminder, Banxico seeks to attain an inflation price of three% +/- 1 share level above or beneath that degree). In the meantime, core inflation, a intently watched indicator by coveragemakers that excludes unstable gadgets corresponding to gas and agricultural merchandise, jumped 4.58% y/y, its highest degree since December 2017.

Trying on the knowledge, there isn’t a doubt that the headline CPI result’s worrisome, however what’s extra troubling is the relentless rise in core inflation, as this factors to broadening worth pressures within the midst of climbing prices for providers. Because the economic system reopens extra absolutely within the coming months, pent-up demand ought to exacerbate the noticed development, making certain the prevalence of elevated inflation ranges for the rest of the yr and maybe past.

To make sure that inflation converges to focus on over the coverage horizon and that expectations don’t grow to be unanchored by second-round results, Banxico could have no selection however to boost borrowing prices once more within the second half of 2021. The market is at present pricing in two further 25 foundation level price hikes via the top of the yr, though expectations for a 3rd hike are beginning to agency. If all three hikes materialize, Banxico’s benchmark price will finish the yr at 5.00%.

Tighter financial coverage from Banxico would elevate nominal charges within the nation and ought toincrease the Mexican peso, so long as US treasury yields stay low in relative phrases. Nevertheless, as I argued in a earlier article, for the search-for-yield commerce to work in favor of MXN, volatility must keep subdued (for reference, many merchants select to look at the VIX Index to see how volatility is behaving within the broad market). Quite the opposite, if investor sentiment deteriorates, markets grow to be defensive and turbulence ensues, nothing would preclude the Mexican peso from weakening towards the greenback. Sometimes, when danger aversion flares up, merchants cut back EM FX publicity to hurry into safe-haven property.

USD/MXN TECHNICAL ANALYSIS

From a technical perspective, following a short leap to the upside, USD/MXN seems to have stalled once more within the 20.00/20.20 space after colliding with its 200-day shifting common. From right here, if promoting strain begins to accentuate, the primary help seems on the 19.80 mark, adopted by the 2021 low close to the 19.55 area. Past this ground, the 19.00 psychological degree comes into play.

Alternatively, if bulls regain management and USD/MXN manages to breach the 20.00/20.20 resistance decisively, patrons might propel the change price in direction of the 20.75 degree, the place the June excessive converges with a 12-month descending trendline.

USD/MXN TECHCNICAL CHART

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—Written by Diego Colman, DailyFX Market Strategist

Comply with me on Twitter: @DColmanFX