Banxico expected to cap volatility, Mexico inflation in focus

USDMXN has reached the target of 16.50 a few months too early (this was forecast for end-2015). The FX commission's announcement and heavy short positioning in MXN argue for staying on the sidelines. 

"Even though we do not anticipate a decoupling of USDMXN from our broad USD strength view, we do think that USDMXN potentially could have a correction toward 15.85-90, a level that we find attractive to re-establish long USD positions," says Barclays.

Friday, INEGI will publish inflation numbers for July. A monthly increase of 0.22% is expected, a little above market expectations of a 0.16% m/m increase. This print should confirm inflation near historical low levels and muted FX pass-through. Even though monetary policy expectations in the weeks ahead should continue to follow MXN price action closely, Banxico will face a dilemma and will find difficulties tightening monetary conditions as fast as implied in the term structure of the interest rate curve.