If the swap market predictions come to fruition, it would be the first time in at least a decade that Banxico has entered an easing cycle before the Fed. It may do so given Mexico’s strong economic fundamentals relative to its peers and a wide spread. with US rates nearing their highest level in more than a decade. And as the peso holds firm, banks like UBS and Barclays are urging investors to double down on rate cuts.
“Banxico started tightening its rates before the Fed did,” said Jens Nystedt, a senior portfolio manager at EMSO Asset Management in New York. “This sets the stage for a decoupling at the end of the Fed hike cycle. So, yes, Banxico can decouple on the side.”
It is not only the market that contemplates what was previously unthinkable. Banxico deputy governor Galia Borja has also indicated, with great caution, that she sees an option to break the pattern of interest rate hikes in line with the Fed if economic variables improve.
The Mexican peso has advanced more than 5% against the US dollar this year, the top-earning currency among the 23 major emerging market currencies Bloomberg tracks, after the Russian ruble. That gives policymakers some leeway when deciding whether to stop following in the Fed’s footsteps.
Additionally, Mexico’s economy is currently doing well compared to its peers. The nation is expected to post a current account deficit of 1.23% this year, lower than those of Brazil, Chile, Colombia and Peru, according to the latest IMF forecast released in October. The IMF also projects that the Mexican economy will expand by 1.15% next year, while Brazil is estimated to grow only 1% and Chile’s output will likely decline.