BofA Calls Out Aggressive Swaps Traders as Mexico Growth Slows

  • Central bank will only raise rate 25bps by year-end, BofA says
  • Mexico has cut its 2017 growth forecast and slashed spending

To Bank of America Corp., traders speculating on the direction of interest rates in Mexico may be underestimating the worsening outlook for the economy.

That’s why Ezequiel Aguirre, a strategist at the Charlotte, North Carolina-based bank, is telling clients to bet against them in the swaps market. He says the central bank will only raise borrowing costs by a quarter-point by year-end, half the increase predicted by traders.

Just last week, Mexico cut its growth forecast for 2017 and announced plans to slash spending by an estimated 175 billion pesos ($9.79 billion) after manufacturing exports slowed and lower oil prices crimped revenue. The central bank, led by Governor Agustin Carstens, unexpectedly lifted the key rate by 0.5 percentage point to 3.75 percent in February as part of coordinated government moves aimed at shoring up the peso. The currency has rebounded 6.1 percent since then, easing concern that a weak peso will fan inflation in Latin America’s second-biggest economy.

“From a macroeconomic standpoint, there isn’t much that would lead you to think Mexico needs a rate hike,” Aguirre said in a phone interview from New York. “The market has gotten ahead of itself. Growth is below potential, inflation even though it has increased modestly in the last few months is still very well behaved."

Ricardo Medina, a spokesman for Mexico’s central bank, declined to comment on expectations for monetary policy.

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