Mexico’s first half-month consumer inflation for June fell by 0.11%, undershooting market expectations of a 0.1% increase. The print points to a decline in the CPI over the fortnight, contrasting with forecasts for a modest rise.
The gap between the outcome and the consensus estimate amounts to 0.21 percentage points. Markets will parse the data for implications for near-term price dynamics and the policy backdrop, as the weaker-than-expected reading adds to evidence of easing inflationary pressure.
Rate Cut Probability and Fixed Income Strategies
The surprise deflationary print of -0.11% for the first half of June changes the immediate outlook. This data point significantly increases the probability that the Bank of Mexico will consider an interest rate cut sooner than the market expected. With the central bank’s policy rate currently at a high 11.00%, this negative inflation figure provides them with ample room to ease policy.
Given this, we see value in positioning for lower interest rates through TIIE swap contracts. Traders should look to enter positions that benefit from a fall in Mexican yields, such as receiving the fixed rate on these swaps. This is especially true for contracts maturing in the next six months, as they are most sensitive to a near-term policy shift.
Exchange Rate Implications and Trading Tactics
This outlook also has direct implications for the Mexican Peso. A potential rate cut narrows the attractive yield differential that has supported the currency, which is currently trading near 17.50 per U.S. dollar. We believe buying call options on USD/MXN is a prudent strategy to hedge or speculate on a weakening peso in the coming weeks.
Historically, the peso is sensitive to shifts in monetary policy expectations. The last time inflation surprised this much to the downside in a non-recessionary period, Banxico signaled a more dovish stance within weeks, causing a notable uptick in FX volatility. We expect a similar environment to develop, making options an effective tool to manage the anticipated price swings.
