LatAm: No reasons for Banxico to have a hawkish bias; BCB to deliver 50bp hike

Barclays notes:

Mexican inflation at new all-time lows should weigh on Banxico's decision next week. Despite recent weakness in EM currencies, we find little evidence of a broad FX pass-through and think that Banxico has enough arguments to soften its language. Economic growth below potential and a subdued optimism around reforms coupled with well-anchored inflation expectations will likely keep Banxico in check in the next few months. Any decision to hike in the months ahead will be strictly dependent on the Fed's action and MXN developments. 

In addition, we believe that Brazil's developments and China's growth concerns will continue exerting some pressure in the MXN. We remain confident that USDMXN will continue its upward trend towards out forecast of 16.50, but we acknowledge the risks of a pullback in the short-term given how stretched the positioning is. 15.90-16.00 should serve as a good entry point to re-establish/add long USDMXN positions.

In Brazil, despite very weak economic data in the past few weeks, we believe the BCB will hike the Selic rate by 50bo in its next meeting (in line with consensus). After last week's adjustment in the primary surplus and recent inflation developments, we think that Copom models will continue showing that more tightening will be necessary in order to move inflation to the midpoint of the target in 2016 and to strengthen the process of anchoring inflation expectations. While this keeps monetary conditions tight, fiscal imbalances continue to deteriorate in an environment of a very weak economy and subdued global economic growth. This should weigh on Brazilian assets risk premia, exerting additional pressure to the BRL as a credit rating cut looks more likely.