Mexico\u2019s 12-month inflation rate eased to 3.37% in June, coming in below the 3.52% forecast. The reading points to softer annual price pressures during the month. <\/p>\n
The gap between the actual figure and expectations leaves annual inflation running 0.15 percentage points under estimates. Markets will parse the data for implications for the inflation path and the policy outlook.<\/p>\n
With June’s inflation coming in at 3.37%, well below expectations, we believe the Bank of Mexico (Banxico) now has a clear justification to adopt a more dovish stance. The market is already beginning to price in this shift, with the odds of a 25 basis point rate cut at the August meeting jumping to over 50%, up from just 20% last week. We anticipate Banxico’s next statement will signal this change in policy direction.<\/p>\n
This directly impacts our view on the interest rate swap curve. We are now looking to position for lower short-term rates by receiving fixed on TIIE swaps, particularly in the 3 to 6-month tenors. The front end of the curve has already inverted slightly, which historically precedes a cutting cycle in Mexico, as seen in the period leading up to the 2020 rate cuts.<\/p>\n
For the currency, the Mexican Peso’s main appeal has been its high yield differential, fueling the carry trade. With that differential now expected to shrink, we see a risk of the Peso weakening against the US dollar. We are therefore considering buying USD\/MXN call options, as the spot rate has already tested the 17.20 level, breaking its recent tight range.<\/p>\n
The lower inflation print also reduces the risk premium associated with Mexican assets, which could be supportive for equities. We see potential for the IPC stock index to react positively to the prospect of lower financing costs for its constituent companies. Selling out-of-the-money puts on the index could be a prudent way to collect premium while positioning for this potential upside.<\/p>\n\n\n\n