Mexico\u2019s headline inflation came in below expectations in June, with markets looking for a monthly fall of 0.13% but the outturn showing a deeper decline. The index dropped 0.27% on the month, underscoring softer price pressures than forecast.<\/p>\n\n
The miss versus consensus was clear, as the actual reading undershot expectations by 0.14 percentage points. June\u2019s negative print marks a month-on-month contraction in the headline measure, leaving the latest data set tilted towards disinflation at the margin.<\/p>\n\n
We see the June inflation data, coming in at -0.27% instead of the expected -0.13%, as a clear signal for a policy shift from Banxico. This significant undershoot gives the central bank a green light to consider cutting interest rates sooner than anticipated. The market must now reprice the entire forward path for Mexican monetary policy.<\/p>\n\n
The interest rate swaps market is already reacting, and we should follow this move. As of this morning, overnight index swaps are pricing in an 85% probability of a 25-basis-point cut at the central bank’s next meeting in August. We should therefore consider positioning in TIIE futures or receiving fixed on interest rate swaps to capitalize on falling short-term rates.<\/p>\n\n
This outlook puts immediate pressure on the Mexican Peso. A widening interest rate differential with the U.S. will likely weaken the currency, and we are now looking at USD\/MXN moving toward the 18.75 level in the coming weeks. We believe buying near-term USD\/MXN call options is an effective way to position for this potential depreciation.<\/p>\n\n
Historically, Banxico has acted aggressively, having raised its policy rate to a cycle-high of 11.25% to combat the inflation of previous years. This new deflationary reading is a powerful catalyst for them to begin unwinding that tightening cycle much faster than was priced in last week. The speed of this potential pivot creates opportunity.<\/p>\n\n
For equity derivatives, lower borrowing costs should be a tailwind for the Mexican stock market. We will be looking for opportunities in call options on the IPC index. Companies with high domestic revenue exposure should benefit the most from an easing of financial conditions.<\/p>\n\n\n\n