MXN’s recent performance not enough to justify a hike

Mexico's central bank will meet on June 30 to set monetary policy and barring a further deterioration in MXN performance, or a hike by the Fed, it is unlikely Banxico will tighten. The central bank left interest rates unchanged at its May 5 meeting but is widely expected to match any rate increases in the US.

Peso is at risk in coming months from the following factors - US Fed hike, UK referendum, and a possible US presidential election victory by Donald Trump. Analysts forecast the peso ending 2016 at 17.94 to the dollar, compared with April’s 17.60 estimate.

According to the median estimate of analysts polled in May by the Bank of Mexico, the economy is likely to expand 2.45 percent this year, up from 2.4 percent in April. Gross-domestic-product grew at an annualized seasonally adjusted rate of 3.3 percent in the first quarter, above market expectations, and was up 2.6 percent from a year earlier.

Mexico’s financial stability does not look threatened and inflation is behaving well. The inflation data received recently —as well an inflation expectations — don’t suggest that FX-inflation pass-through risks are particularly strong.

"Our read on recent communication from and with Banxico is that, MXN’s recent performance is not enough to justify a hike, even if the peso has underperformed," said Scotiabank in a report.