- Banco de México will hold its next monetary policy meeting on August 10. We believe it will maintain its monetary pause despite the FOMC’s hike. Indeed, with inflation moderating, we see room for Banxico cutting the benchmark rate by 4Q23 as monetary conditions are already restrictive and real rates are above neutral.
- Nominal curves usually shift to the downside following hiking cycles once the CB reaches its terminal rate, and we are expecting this to happen again this time. We remain constructive on the short end of nominal curves. In the TIIE curve, we still see more value in the 13X1 TIIE vs. the 26X1 slope as we are expecting a normalisation of the curve going forward.
- In the TIIE FRAs, there is also scope for relative value strategies because forwards are below spot rates as markets are shifting to factor in a monetary pause and the start of an easing cycle.
- The 1Y/1Y vs. 1Y TIIE spread is negative, so paying the forward rate and receiving the spot rate makes sense as we anticipate the spreads should adjust to the upside in the coming months when the 1Y TIIE starts to incorporate lower rates as FRAs do.