Today we have the minutes of the Bank of Mexico and the market is looking for a hawkish message but we think this is priced in if they disappoint we expect the USD to rally from support…
In Mexico, Today’s publication of the minutes of the May meeting might will give an indication of how hawkish the central bank is going forward:
“The majority of the central bankers had voted in favor of a 50bp rate hike to now 7% with one member favoring a larger step. Banxico’s hawkish approach had further fuelled the market’s rate expectations, quite a few market participants seem to expect a larger rate step in June. That means a lot seems to have been priced in already, which is also reflected in the robust peso.” (Commerzbank)
Many forecasters point to stronger economic growth this week supporting the central bank being hawkish but the GDP print was not as good as many think it is and we see the good news in terms of rates as priced in
While Mexico’s GDP grew an annualized 3.6 percent in first-quarter 2022, a good increase from the fourth quarter’s 0.1, if we look at first-quarter GDP growth it came in below analysts’ expectations of 4.6 percent.
Mexico’s GDP outlook for 2022 will deteriorate, further due to the deceleration in global economic growth, supply-chain bottlenecks, higher inflation, and tighter monetary policy.
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The consensus forecast for 2022 GDP growth, compiled by Banco de México, fell again in April to 2.1 percent while Inflation increased further as a result of price pressures related to energy and commodities rising in price.
The big picture is of a global economy that could have a recession and this means lower commodity prices which is bearish for the Peso.
Also, the Fed is hiking rates and reducing its balance sheet which hurts emerging markets like Mexico which rely on large dollar inflows.
We see a limited downside for the USD and plenty of upside. Our view of the key levels of support and resistance to look out for below.
We are trading near daily lows and volatility is dropping. If our view is correct on the central bank disappointing the market look for an upside breakout from the triangle to follow through to the upside.