On Thursday, the Bank of Mexico unexpectedly rose the key interest rate by 25 basis points to 4.25%; it was the first hike since 2018. As a consequence, analysts at Rabobank have shifted their USD/MXN point forecast from 20.5 in one month to 20, with the risk skewed to the downside. They still expect the broader range 19.5 – 21.0 to hold, but they have shifted to a narrower trading range forecast to 19.5-20.25.

Key Quotes: 

“We have adjusted our Banxico policy rate forecast to now incorporate two more 25bp hikes by year-end taking the policy rate up to 4.75% heading into 2022.”

“In terms of the currency, we had already signalled a turn in price pressures in light of the confluence of a trifecta of reversal signals at 20.39 with a target of 20.12. The move through that level triggered a renewed expectation of a grind down to 19.80 over the course of the next couple of weeks but the surprise rate decision accelerated that move to 19.80 from two weeks to two minutes.”

“We have lowered our one month forecast from 20.5 to 20.0 but as regular readers will know, we have long highlighted a broader 19.5-21.0 trading range and a narrower 19.8-20.5 range. We still expect the broader range to hold, but we have shifted our narrower trading range forecast to 19.5-20.25.”