Mexico: Banxico following on the BCB's footsteps.
In a Trade Recommendation note, we discuss the market impact of the FXintervention plan recently announced by Banxico. The new intervention plan –using exchange rate swaps instead on spot – could be a game changer for theMXN. The decision came with a significant delay, but it should be in principle beeffective nevertheless given the still relatively heavy short-MXN positioning. Theintervention should be especially impactful if policymakers keep on tighteningboth fiscal and monetary policies as required to compress domestic absorption.
Details regarding the implementation and timing of the program are yet tobe revealed but in Brazil’s case in the past the size of the intervention grewquickly and reached 40bn in two months and USD90bn a year later. Banxico'sintervention should fuel the unwind of MXN shorts, with direct impact in FXvolatility and rates.
While we expect a spur of FX strength, structural issues with the MXN are stilllingering. We therefore favor a tactical bullish stance through FX options. Welook at 2 variation of low strike USD/MXN exposure using vanilla and barrierinstruments. We also consider using USD/COP vol shorts as an enhancement tothe latter.
Beyond FX we analyze the effect of the new mechanism in rates. We argue thatthe move should favor TIIE (outright or in spread) but more so in the long end.
Finally we argue that while the FX subordination era might be coming to an end,inflation (spot and expectations) are still high. Banxico might therefore continue to frontload their cycle despite the FX, a risk that in our views affects the frontend more so than the long end. (责任编辑：admin) |