FxWirePro: Spotlight On Mexican Central Bank, Banxico’s Rate Cut On Cards & USD/MXN Options Trades

Mexico's central bank, Banxico, is expected to cut its key interest rate for the fifth consecutive time today to support the economic recovery after the pandemic-related slump. Like the consensus, we expect a further large step of 50 basis points to then 4.5%.

Banxico cut its benchmark interest rate for the 9th straight meeting on June 25th, 2020, lowering it 50 basis points to 5.0%.

The first estimate of gross domestic product in the second quarter showed that the economy shrank by almost one-fifth compared with the same period last year. And the recovery is likely to proceed only hesitantly due to the low level of fiscal support measures so far and ongoing restrictions in some regions, as the number of new infections remains high.

However, consumer prices have recently risen more strongly than expected. Overall and core rates rose to 3.6% and 3.9% respectively in July, so that both are approaching the upper end of the central bank's target corridor of 2% to 4%. Against this background, some members of the Governing Board see limited scope for further rate cuts. They could therefore vote for a smaller rate cut.

Thus, the market is likely to focus on the voting results and above all on Banxico's communication on the interest rate outlook: the central bank could signal that it will act more cautiously in the future because of the high price pressure, or even suggest a pause in interest rates. Thus, a somewhat hawkish statement could provide some support for the peso.

Trade recommendation: Initiated USDMXN short 6M straddles vs. long 1Y 25D strangles in 100:50 vega ratios. Both legs require active delta-hedging.

Alternatively, We also considered 3M USDMXN debit call spreads 21.46/23.50 (when spot reference was at: 22.168 levels, currently, trading at 22.330 level). Simultaneously, sold EUR vs MXN in cash at 27 levels. Marked at 2.04%. Courtesy: Commerzbank