Mexico

Mexico's central bank is widely expected to remain on hold at the conclusion of today's policy making meeting. The key rate has been steady at 4.5% for nine months. Most recently Finance Minister Cordero has argued that inflation is "controlled" and year-end inflation is likely to be just over 5%. It was just below 5% in March.

Cordero also suggests there is more peso appreciation to come, but at least in the near-term the market is not as convinced. There has been better two way activity in recent days as some suspect that the 7.7% appreciation of the peso since early Feb is a bit much. There is also some concern that Mexico's central bank may step up its dollar purchases this month.

Currently it buys $600 mln a month through the options market. While some identified the improvement in the US auto market as a bullish development for Mexico earlier this year, there now is talk that Mexico is losing market share to Canadian producers. Other data, like the same-store retail sales (3.2% year-over-year) suggest that domestic demand may be improving.

The risk is that price pressures increase over the coming months. The year-over-year rate is likely to climb as Q2 009 monthly CPI prints were very low, including an outright decline last May. The trend is clear as the 3 month annualized pace is faster than 6-month pace, which is faster than the 12-month pace.

There have been other times in the recent couple of months that the peso's ascent seemed to have been tired, but each time the resilience of the peso has been demonstrated. Prudence is required. The first obstacle the dollar needs to surmount comes in around MXN12.23-MXN1.12.25.