Mexico peso likely to lose ground vs greenback if 10-year UST yields continue to rise, says Commerzbank

The Mexican peso is expected to lose ground against the dollar if the United States’ 10-year Treasury yields continue to rise and the greenback appreciates on a broad basis against the EM and G10 currencies, according to the latest research report from Commerzbank.

The Mexican central bank (Banxico) once again proved its credibility by leaving the key rate unchanged at 7.75 percent yesterday, while at the same time displaying a hawkish approach. Interest rates in Mexico area already high, and moreover Banxico sees downside rather than upside risks for the economy even if the former have eased slightly following the agreement of the USMCA deal.

That is why it preferred to keep interest rates on hold for now. At the same time the central bank is keeping a close eye on the recent rise in inflation - mainly due to the rise in oil prices. It slightly raised its projections for the overall rate at yearend 2018.

Among the upside risks to inflation are, according to the central bank, pressures on the peso exchange rate, additional upward pressures on energy prices, escalating protectionist measures worldwide and greater-than-anticipated public expenditure.

At the same time Banxico also underlined that in case of real depreciation of the exchange rate it would ensure that this development took place in an orderly manner and without second round effects - i.e. that it will intervene on the FX market, the report added.

Moreover it promises to tighten monetary policy in a timely and robust manner if this was necessary to ensure that inflation was to converge to the target of 3 percent, that the monetary policy stance relative to the US under an adverse external environment for emerging markets is appropriate and the anchoring of medium- and long-term inflation expectations is strengthened.