A relative softening in both headline and core consumer price measures has allowed the Banco de Mexico to shift onto a data-dependent footing in recent months, using forward guidance to signal an extended pause ahead. Markets think rapidly-decelerating inflation and a deteriorating growth outlook will force central bankers into a u-turn in the fourth quarter, with implied prices pointing to at least two rate cuts by the end of the year. We aren’t confident this will pan out – Mexican policymakers have traditionally waited for a reversal from the Fed before launching their own easing cycles, and are unlikely to welcome a precipitate loosening in financial conditions – but we also think rate differentials will remain wide enough to maintain the peso’s role as the world’s preferred carry currency.

12-month carry return by funding currency, %