Policy Expectations And Inflation Risks
We no longer expect an off-cycle rate hike ahead of the June 18 monetary policy meeting. Our focus now shifts entirely to positioning for a 50 basis point hike at that scheduled event. This adjustment is based on inflation risks that, while moderating, have certainly not disappeared. The recent inflation data supports this view, with May inflation quickening to 3.9% from the month prior. This uptick puts pressure on the central bank to follow through on its hawkish signals. We are therefore positioning for higher short-term interest rates, primarily through interest rate swaps where we would pay the fixed rate. Continued peso depreciation also reinforces our strategy, with the currency currently trading near 58.75 against the dollar. This weakness raises concerns about imported inflation, especially for crucial commodities, giving the central bank more reason to hike. The expected rate increase is now seen as a necessary move to put a floor under the currency.Peso Volatility And Longer-Term Outlook
Historically, we must be cautious about assuming a rate hike will automatically lead to a stronger peso. We saw in 2022 how the peso weakened against a very strong dollar despite a series of aggressive local rate hikes. Consequently, we are considering currency options to protect against further peso volatility rather than betting on an outright rally. Looking beyond the next few weeks, we are pricing in a further 25bps increase in August. We do not foresee any policy easing or rate cuts until at least the second quarter of 2027. This longer-term outlook reinforces the case for being positioned for a higher interest rate environment for the foreseeable future.Start trading now — click here to create your real VT Markets account.
