Mexico’s central bank has sufficient ammunition to intervene on an intermittent basis in FX markets to counter sharp selloffs in the peso. But the bigger picture is that interest rate hikes will remain policymakers’ main defence against a weaker peso (and the associated impact on inflation). With President-elect Trump showing little sign of toning down his protectionist rhetoric, we now expect the peso to end this year at 23/$ (compared to 22/$ currently). What’s more, we expect interest rates to rise to 7.50% by end-2017 – which is much higher than the current consensus.
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