Although MXN is somewhat cheap compared with its long-term fair value, headwinds to global demand, coupled with the consequences of lower oil prices, justify the short-term undervaluation. The risks are tilted to further weakness, although moderately so. On Thursday, the inflation print for December will be released. It is not expected to be a market driver, as monetary policy is completely tied at this point to the US. The number will probably confirm that inflation remains very low and close to 2%, way below the target. A slow convergence to 3% is expected during the next year, giving Banxico ample space to remain accommodative.

The BRL story is very different, and it is expected to continue to be one of the worst performers in LatAm. The country has been spending the past months in a political fight that has only delayed the approval of structural reforms and the much-needed fiscal adjustment. The damage that has already been done to the economy through the destruction of potential output will only make the stabilization of the debt/GDP path more difficult. Therefore, although not the main scenario, the probability of monetization should continue to increase, pushing inflation expectations up and weakening the BRL. On Friday, inflation data for December are released, which should be close to 11% if the market consensus is accurate (10.77%). 

"Although we acknowledge the dilemma that the central bank faces, given the de-anchoring of inflation expectations, we do not think that it will be able to deliver as many hikes as currently priced in the DI curve. The next monetary policy meeting will give us more light, but we would argue that a shallower tightening path would weaken the BRL further", notes Barclays.