Banco de México (Banxico) raised the policy rate by 50bps in May. Economists at Standard Chartered now expect Banxico to raise the policy rate by 75bps in June (versus 25bps prior). In their view, hawkish Banxico should support the Mexican peso in the near-term.

Banxico to raise the policy rate by 75bps in June

“The increasing possibility of a 75bps rate hike from Banxico in June should exert downward pressure on USD/MXN.”

“In the near-term, with broad FX volatility declining, high carry should continue to support the peso. However, MXN has shown a rising correlation to US equities, which warrants caution given shaky risk sentiment.”

“Despite vulnerability to broader market moves, we think MXN benefits from attractive underlying macro fundamentals. Mexico’s external vulnerabilities are limited, with low foreign positioning in fixed income and a current account bolstered by record remittances.” 

“Over the medium-term, anaemic domestic growth and a lack of structural reforms will remain a headwind, while the potential for a US slowdown is a key risk to watch.”