In today´s radar, we analyze the recent outperformance of local rates while USD rates are starting to price in a more hawkish stance from the FOMC. In addition, we explore the effects of global USD liquidity and hawkish expectations in the MXN forward curve about Banxico's stance, which continues to translate into negative basis.
Markets’ attention has been on the first FOMC meeting in 2022. During recent weeks, US curves have been under pressure and are now pricing in between three to four hikes from the FOMC in the following year. Inflation keeps pointing north, and recent speeches by Committee members suggest a more hawkish stance. A more aggressive surprise in today’s decision will weigh on rates overall, but we highlight that the recent shift to more timely exit strategies is widely factored in. We also note that the spread between MBonos and USTs has fallen amid this dynamic, which is in line with our view that on the local front, markets were already discounting a much more hawkish Banxico. Meanwhile, the basis continued to adjust to the downside. At the short end (from the 3M to the 3Y), basis are at negative levels and they have fallen further since our last ASW. Longer tenor basis are still positive, but also maintain a downward trend in line with the dynamics seen in the last tightening cycle. Excess USD liquidity and more hawkish funding expectations in the MXN forward compared to local rates are weighing on the basis. Finally, in terms of UMS asset swaps, spreads against the MBono at the short end of the curve (3Y-5Y) have adjusted upwards, in line with our view. We see scope for further increases in UMS asset swaps at the short end as the risk implied in the UMS is too low. From the belly to the long end, UMS ASW levels continue to be more attractive than local rates. That is, paying the front end of the UMS ASW and receiving the long end seems a more appealing strategy for funding purposes.