Banxico needs to keep pace with the Federal Reserve. If not, the Mexican peso could come under significant pressure, according to economists at ING.

1.25 seems a target for ZAR/MXN in 2Q22

“Banxico normally targets USD/MXN stability through keeping a 600bp policy spread of the Fed funds rate. The Mexican policy rate is now 6.50% and the market indeed prices it at 9.50% next year on the back of a 300bp Fed tightening cycle. Failure of Banxico to follow the Fed could see the MXN coming under pressure.”

“There are no signs as yet that Banxico is ready to forego USD/MXN stability.” 

“Mexico's dependence on a strong US economy puts Mexico's economy on more solid ground than South Africa, which has greater ties to China. Both the MXN and the rand (ZAR) are high beta emerging market currencies. Both will be challenged by the developed world quickly taking real rates into positive territory. But the Mexican peso should outperform the rand and has a 280bp per annum positive carry via the three-month implied yields. 1.25 seems a target for ZAR/MXN in 2Q22.”