Banxico: Markets expect no rate hike but…
It is very likely that Banxico will maintain tonight its rate differential with the Fed. The Mexican central keeps on trying to avoid capital outflow that would result from a narrower rate differential. As a result Banxico should keep on hold its overnight rate to 7%. We remember that Banxico changed in 2015 the agenda of its meeting to carefully follow Fed meetings.
This year the central bank has increased four times its overnight rate triggering the strengthening of the MXN. But now, we see things are slowing down. When looking towards the Fed, we believe the US private institution will have more difficulties to deliver further rate hike before 2018 and that the promised shrinking of the balance sheet could provoke further turmoil. This is why we see Banxico cooling down its aggressive hawkish monetary policy and lower its interest rates before year-end.
However, Banxico has definitely some time to do it. Indeed, for example Mexican exports have largely increased in 2017 despite the MXN strengthening which went from 22MXN to almost 17MXN in 7 months against the greenback. This is mostly due to the oil prices jump this year but also to the uncertainties regarding the free trade agreement between US and Mexico that should be renegotiated – Trump estimates that the deal favours low-wage countries.
Other than that, the fundamentals of Mexico are still on the soft side and renewed lower oil prices could very easily reveal all underlying difficulties of the countries. We are turning bearish on the MXN as we believe that Banxico will likely not let the currency appreciate forever knowing that the US giant recovery may take some more time.
NZD/USD tumbles as RBNZ talks the Kiwi down
The New Zealand dollar already started the week on the back foot on the heel of a disappointing second quarter’s inflation figures. It was only the beginning. On Thursday, the Kiwi took another hit but from the central bank this time. Following its monetary policy meeting, the Reserve Bank of New Zealand decided unsurprisingly to hold the official cash rate at 1.75%. However, the monetary institution made a dramatic shift in its language as it made clear it is not happy, at all, with the current strength of the Kiwi.
Assistant Governor McDermott suggested for a second that the bank could move back to intervention should the circumstances require so. However, he added as he tried to allay an overreaction of markets that it was just a little nudge, rather than “a slap across the face”.
NZD/USD was off 0.70% after the release of the statement and the press conference of Governor Wheeler. McDermott’s comments were the final in the coffin, sending the local dollar down another 0.60% to 0.7267. We maintain our bearish view on the pair with the 0.72 level as next target in the short-term.
