Mexico’s March inflation likely to near central bank’s target

Headline inflation seems moving in line with central bank's target level of 3.0 % post sharp decline in inflation in January due to the end of long-distance telephone charges (that has reduced housing inflation substantially and kept core inflation below 2.5%) and lower transport inflation. More recently, food inflation has also moderated (from 6.54% YoY in December to 4.93% YoY in March).

The only major category that has seen modest inflation acceleration over past couple of months is health and personal care. The inflation rate was recorded at 3.14 percent in March of 2015. Inflation is estimated to have moderated slightly in April to 3.06% YoY (-0.26% MoM) while core inflation likely slowed marginally to 2.42% YoY (0.27% MoM).

In Mexico, the most important categories in the CPI basket are Nonfood Goods (19.7 percent of the total weight); Housing (18.7 percent) and Other Services (18.4 percent). Food, Beverages and Tobacco account for 14.8 percent and Energy for 9.5 percent. Others include: Products subsidized by the government (5.3 percent); Education (5.1 percent); Meat and Eggs (4.8 percent) and Fruits and Vegetables (3.7 percent).

Looking ahead, we do not see any major factor disturbing this set-up as the prevailing output gap, lower wage growth and low MXN pass-through are likely to keep inflation in check structurally. As a result, growth in aggregate demand will remain the key driver for both inflation expectations and monetary policy in the medium term.

And in addition, Mexican trade surplus shrank to USD 479.8 million in March of 2015 from a USD 948.9 million surplus a year earlier, as imports grew at a faster pace than exports.

Technical and Derivatives insights:

Daily charts of USDMXN steeping up from last couple of bull rallies and it remains intact as no signals of reversal in trend. RSI (14) showing positive convergence with red line cross over on stochastic curve at above 75 levels do not indicate any harm in uptrend and is still on good mood after taking some minor correction rallies. We could only see near support remains at around 15.2309 levels.

Anticipating further upswings in near term trade sessions, we simply advocate At-The- Money calls for hedging purpose. Traders should focus on near month futures for better economical dips to catch upward rallies. Cost of hedging should not exceed option premium plus brokerage and other charges.