USD/MXN could jump to 20.75 if Banxico rises only 25bps – Wells Fargo

On Thrusday, the Bank of Mexico (Banxico) will announce its decision on monetary policy. Market consensus points to a 25bp rate hike while some analysts see a 50bp hike. Analysts at Wells Fargo side with financial markets and expect a 50 bps rate hike; however, should consensus be proved accurate, the Mexican peso could come under pressure in the immediate aftermath of the meeting.

Key Quotes: 

“Should consensus economists prove accurate and Banxico lift rates only 25 bps, we would expect the Mexican peso to selloff sharply and USD/MXN to push toward the MXN20.75 level. On the other hand, should the central bank lift rates 50 bps and maintain a similar level of concern over inflation as we expect, the peso reaction could be more muted. Should our base case scenario unfold, we would expect the Mexican peso to settle back to pre-policy rate announcement levels as we believe financial markets are priced for this scenario.”

“In a nod to our fellow international economists, we do feel financial markets are priced for too aggressive tightening between now and the end of this year. Right now, markets are priced for 100 bps of tightening before the end of 2021. In our view, following a 50 bps hike on Thursday, policymakers are likely to slow the pace of tightening and lift the Overnight Rate only 25 bps in December. Our less hawkish view relative to market pricing is key a rationale behind our medium-term view for Mexican peso weakness.”

“As financial markets adjust to a more gradual pace of tightening after the November meeting, we would expect downward pressure on the peso to build and for the currency to weaken into the end of 2021.”