Just as I had hoped and anticipated, the Banco de Mexico hiked its interest rate to 7.0% on June 22nd and kept pace with the U.S. Federal Reserve’s rate hike. Apparently, this rate hike was not a news flash. According to Reuters, the consensus opinion also anticipated a rate hike:
“Analysts expected Mexico would match the Fed’s quarter-point rate hike last week in a bid to maintain the appeal of peso-denominated debt to yield-hungry investors.â€
Now the question is the future path for rate hikes. Banco de Mexico suggested that rates are now high enough to contain a spike in inflation that has risen to 6.3% (the highest since 2009) and guide the economy back down to the 3% target. Reuters quoted Governor Agustin Carstens from a Bloomberg article:
“‘We believe that where we are now will lead us to the 3 percent (inflation target) level at some point. We are ready to make the statement that up to today we think it is sufficient but we will be very vigilant.’â€
The peso strengthened accordingly against the U.S. dollar but only after an initial intraday “sell the news†reaction. The resulting rise in USD/MXN allowed me a fresh opportunity to fade and get a cheaper starting point for taking advantage of the next round of peso strength. I locked in the profits during Friday’s continuation selling in USD/MXN.
The Mexican peso strengthened against the U.S. dollar in the wake of the seventh rate hike in a row from the Banco de Mexico. USD/MXN has not made a fresh low yet though.
Source:Â FreeStockCharts.com
Interestingly, speculators harbored the same hesitation I had going into the Banco de Mexico statement on monetary policy. Mexican peso bulls significantly withdrew with net long contracts dropping from 95,814 to 48,985, a near 50% cut.
Speculators retreated on net shorts ahead of the Banco de Mexico’s statement on monetary policy. I expect these shorts to rebuild.
