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📝Banxico to Hold, May Ignore The Recent Peso Depreciation: Commerzbank

Given the new circumstances, Banxico is likely to remain on hold again. Before the turmoil, this would have been a different story; another 25 basis point cut would not have been unrealistic at the time. However, this is unlikely to be the case now. Banxico could cite the depreciation of the peso as one of the reasons, but it could also point to other factors. For example, Mexico's economic activity indicator - an index that is published monthly and therefore allows an assessment to be made before the quarterly GDP figures are released - recently surprised to the upside on a year-on-year basis. And although core inflation continues to fall (see Figure 4), it is still well above the inflation target. Accordingly, Banxico could argue that while the recent progress in the core rate is encouraging, it would like to see further progress first.

Banxico will probably do its best to ensure continued stability. But political risks pose a major threat to the super peso. Anyone betting that the market's latest warning shot was enough to dissuade the government alliance from its rather critical plans is likely to be betting on a stronger peso again. In that case, the recent move would have been premature, and we should see USD-MXN levels back towards 17.

-Commerzbank


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