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The peso, heading to its best week in 13 months after increasing rates

A 50 Mexican peso bill on dollars . / Edgard Garrido

(Bloomberg) – The Mexican peso advanced for the fifth day in a row, poised to post the best weekly performance since May 2020 after a surprise 25 basis point increase to the key rate announced by the central bank on Thursday.

The currency was up 0.59% to 19.7413 per dollar, for a total gain of about 4.7% so far this week. One-month implied volatility of the peso falls for the fourth day to 10.405%, its lowest level since June 10.

Why does the weight get stronger

A weak dollar, strong emerging market currencies and record highs in US equities helped improve risk appetite and benefit the peso. The CPI readings released Thursday, above estimates, and Banxico’s hard-line stance provided additional support for the currency.

Friday’s session high for the peso was 19.7059 per dollar. Further advances could lead the coin to test the June high of 19.5987, which has not been reached since the 9th of the month. The maximum weight for 2021 is 19.5494, last observed on January 21.

TIIE rate swaps advanced across the board on Friday; the front of the curve rose more than the rear, leading to a downward flattening of the curve. Two-year swap rates soared 16 basis points on Friday on top of Thursday’s 46 basis point increase, reaching the highest level since March 2020. The market is discounting about 130 basis points of additional hikes for 2021, which it would take the policy rate to exceed 5.5% by the end of the year.

Banxico’s next moves

Banxico is expected to make three increases of more than 25 basis points this year, in August, September and November, and the policy rate to end the year at 5%, according to a JPMorgan report.

The probability of increases of 50 basis points cannot be ruled out if market conditions deteriorate dramatically before a possible reduction of the Fed’s asset purchase program or if the underlying CPI accelerates further.

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(Some of the information comes from currency traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly.)

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Original Note: Peso Poised for Best Week in 13 Months After Hike: Inside Mexico

NOTE: George Lei is a currency strategist writing for Bloomberg. The comments you make are your own and are not intended to be investment advice.

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