Banxico Signals Dovish Pivot
Banxico’s surprise 25 basis point cut, deeper than the market expected, signals a clear dovish pivot to support a slowing economy. After inflation showed signs of cooling from its 2025 highs to a more manageable 3.9% last month, the central bank is now prioritizing growth. We see this as the start of a more aggressive easing cycle than what was priced in. This policy divergence from a still-cautious U.S. Federal Reserve should put sustained pressure on the Mexican Peso. The MXN’s strength, a major story through much of 2025, is now vulnerable as the attractive yield differential narrows. We are positioning for a weaker peso by buying USD/MXN call options targeting a move towards the 18.20 level in the coming weeks. For equity derivatives, lower financing costs are a clear positive for the Mexican IPC stock index. Companies that struggled with high interest rates over the last year now have a clearer path to margin expansion. We are looking at buying call spreads on the iShares MSCI Mexico ETF (EWW) to capture this expected upside through the second quarter. The unexpected nature of this cut has caused a spike in short-term implied volatility, which has jumped nearly 12% in the last 24 hours. This makes selling volatility through strategies like short strangles on the peso attractive for those who believe the initial shock will subside into a steady depreciation. This is a contrast to the low-volatility environment we saw at the end of last year.TIIE Curve Prices Further Easing
Looking at the interest rate markets, the TIIE swap curve is now pricing in a much lower terminal rate for the end of 2026. This confirms the market’s belief that Banxico will continue cutting rates aggressively. We believe there is still value in entering new positions that bet on further declines in Mexican forward rates. Create your live VT Markets account and start trading now.
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