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13 Mar 2013
Forex Flash: Mexico has cut rates, but MXN is on fire - BBH
Brown Brothers Harriman EM Strategist Ilan Solot, notes that while Mexico has cut rates, MXN remains on fire.
He begins by noting that Banxico hiked earlier than he had expected, but the logic seems to be the same. He thinks that a stronger peso was a factor in their decision to cut, but that was not the main factor. In any case, the rally in peso after the decision left many scratching their heads. He continues to write, “We don’t have a clear answer either, but we would suggest a few factors: (1) the statement could have been firmer than some expected by closing the door for more easing – Banxico didn’t even retain the optionality, making it impossible to even price the risk of another cut; (2) Strong US data; (3) lack of other good options for long EM FX trades. We still think the only factor that could hold back the peso from further gains is positioning, and we caution investors on the risk of sharp short covering spikes.”
He begins by noting that Banxico hiked earlier than he had expected, but the logic seems to be the same. He thinks that a stronger peso was a factor in their decision to cut, but that was not the main factor. In any case, the rally in peso after the decision left many scratching their heads. He continues to write, “We don’t have a clear answer either, but we would suggest a few factors: (1) the statement could have been firmer than some expected by closing the door for more easing – Banxico didn’t even retain the optionality, making it impossible to even price the risk of another cut; (2) Strong US data; (3) lack of other good options for long EM FX trades. We still think the only factor that could hold back the peso from further gains is positioning, and we caution investors on the risk of sharp short covering spikes.”