Reuters saysBanxico will likely make another big hike
We expect Banxico to increase its policy rate target by 75bp to 8.5% on August 11 in a
unanimous decision. If there is a split it would likely be for a larger hike. We expect
Banxico to increase its inflation forecasts and a statement that stresses high inflation,
deteriorating inflations expectations and large Fed hikes. The risk is for a 100bp hike.
How far will Banxico hike?
We expect Banxico to keep a spread of about 600bp with the Fed. This would allow
Banxico to keep the peso relatively strong (vs. other EM currencies).
So current inflation in Mexico is slightly lower than in the U.S., and interest rates are much higher. One way to access higher Mexican interest rates is to buy peso currency futures, since they price in interest rate differentials. All the liquidity is in one month, currently September, and rolling the position monthly would be a slight hassle. How can Americans otherwise invest in the Mexican Peso (MXN) at high interest rates?Mexican inflation in July likely sped up again to a near-22-year high, a Reuters poll showed on Monday, fueling bets the country's central bank will continue to hike its key interest rate through the rest of the year.
The median forecast of 14 analysts projects that annual inflation will hit 8.13% in July, a level not seen since December 2000.
If higher real interest rates on cash are consistently higher in Mexico, this could make retiring in Mexico look attractive for Americans, since they could convert dollars to pesos and earn higher returns on cash, without taking currency risk since their expenses are also in pesos. According to data from the OECD, from 2000 to 2021, the real exchange rate of MXN vs. USD has fallen. In 2000, the cost of living was 55% higher in the U.S. than in Mexico, but by 2021 it was 102% higher. Can any Bogleheads living in Mexico confirm or refute this?
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year PPP USD/MXN ratio
2000 6.103 9.456 1.549
2021 10.043 20.272 2.019