Economic policy uncertainty has surged to levels not seen since the pandemic and markets have found a new wave to surf these new circumstances. The analytical framework in developed economies often assumes an established and uncontested institutional framework, one that, particularly in the case of the US, is rarely questioned. This is what makes the present moment of uncertainty unlike any other. In this note, we provide three analytical concepts behind strategy building in the prevailing dynamics as well as the Mexican markets landscape for the remainder of the year.
- USD as a reserve currency. US dollar activity in financial markets could face a fundamental liquidity transformation in the coming years; however, this is unlikely to be seen any time soon.
- The Fed and US debt. The yield curve reacts constantly and substantially more to the Federal Reserve’s stance than any other macro factor, which, in our view, will continue as long as money in the US retains its sovereignty as the world’s reserve currency.
- The risk premium in equities. Equities have recovered in line with recent tariff negotiations. However, in our view, excessive complacency seems unwarranted in a market environment dominated by contradictory narratives and policies.
- Mexico and the cycle. The Mexican economy has experienced a significant slowdown since 2024. In our view, unless Mexico reaches a favorable agreement with the US —or at the very least, secures a pause in the imposition of tariffs— the negative effects of these trade measures will deepen in the coming quarters.
- Banxico and the need of a lower reference rate. Although inflation levels have picked up somewhat recently, we maintain our more dovish view for Banxico and thus are leaving our 7.50% year-end target unchanged. Monetary conditions remain too tight, and our estimate still assumes an overall restrictive stance. Furthermore, we still expect the Fed to ease rates by nearly 50bp in 2H25, with risks actually tilted to more cuts in 2026. In our view, the interest rate spread vs. the US has scope to narrow by nearly 100bp this year.
- The MXN. The MXN has appreciated in tandem with the recovery in global markets, Nevertheless, when assessing currency performance, considering carry, risk sentiment, fundamentals and valuation factors is key. With this in mind, the MXN has scope to continue to underperform going forward, and we expect a depreciation to levels around USDMXN20.30 in 2H25.
- We have maintained a neutral stance on Mexican equities since the beginning of the year, although, in our view, the rally seems a bit overdone. Of course, upside risks exist, but the probabilities of these materialising are uneven, as 1Q25 earnings results were largely in line with our estimates and, as such, do not imprint a particular bias to our IPC target of 55,850pts for YE25e.
- Asset Allocation update. The context described above continues to support a clear overweight stance in fixed-income assets, in our view. As markets have now aligned with our expectation and these projected cuts are fully incorporated; and as we expect higher risk premiums in the belly and long end, we maintain our preference for the 5Y tenor. We remain overweight in Udibonos, as real rates are attractive at current levels, and structural demand remains intact. In addition, we maintain a constructive view on corporate credit, but solely as a rates trade, as the spreads are not necessarily appealing. Finally, we remain neutral on Mexican equities, as the IPC has already reached our target estimate.