Market Data 
- The Mexican Peso has made losses in line with the established trend ahead of the Banxico meeting on Thursday.
- Most analysts expect a moderate 0.25% cut to the central bank’s cash rate.
- USD/MXN steadily climbs within its rising channel, solidifying the overall bullish bias.
The Mexican Peso (MXN) seesaws between tepid gains and losses in its major pairs on Thursday, ahead of the Bank of Mexico (Banxico) September policy meeting scheduled for 19:00 GMT. Given changes in interest rates can have the high impact on exchange rates, this is likely to be the most important event for the currency this week.
Mexican Peso: Analysts expect 25 bps rate cut today
The Mexican Peso will be in the spotlight today as the Banxico meet to discuss monetary policy and weigh a cut to its official interest rate.
A reduction in interest rates normally has a depreciating effect on a country’s currency because it makes it a less attractive place for investors to park their capital.
The current consensus amongst economists and analysts is that the central bank will opt for a 25 basis point (bps) cut, or 0.25% reduction, in its official cash rate, bringing it down to 10.50% from 10.75%.
In a recent survey of 25 economists by Bloomberg, 20 expected a 25 bps cut, one expected no-change, and four expected a larger 50 bps cut (0.50%).
The survey was held before Mexican inflation data released on Tuesday showed headline inflation (INPC) over the last 12 months fell to 4.66% in Mexico in mid-September, and core inflation (Subyacente) to 3.95%, according to the Instituto Nacional de Estadística Geografía (INEGI). The slight easing in inflation may have increased the odds of a larger 50 bps cut.
That said, data released on Monday showed buoyant Retail Sales and a greater-than-expected rise in Mexico’s economic activity in July, which would argue for a more moderate reduction in borrowing costs in order to avoid overheating.
At the August meeting, Banxico decided to cut interest rates by 0.25%. But the decision was a close call. Only three members voted for the cut versus two who voted to keep interest rates unchanged. The fact it was not unanimous increases the chances of a smaller 25 bps cut over a larger 50 bps reduction.
“One might wonder whether Banxico will also start cutting rates by 50 basis points,” comments Michael Pfister, FX Analyst at Commerzbank, in a note on Thursday. “However, this seems unlikely, at least for the time being. The reasons for this are the aforementioned stubborn inflation, but also the fact that the data from the real economy, while pointing to a slowdown, do not point to a significant economic downturn. In short, Banxico is likely to cut rates by another 25 basis points today,” adds the analyst.
Technical Analysis: USD/MXN starts rising up within channel again
USD/MXN pushes higher within its rising channel, continuing the uptrend bias of recent months. Overall, it is in a short, medium and long-term uptrend. Given the theory that “the trend is your friend”, it’s more likely than not to continue higher.
USD/MXN Daily Chart
Wednesday’s close above 19.53 (August 23 swing high) provides more bullish confirmation that the pair has established a near-term upside bias after it recently bottomed out at the base of the rising channel.
If it can break above 19.68 (the September 25 high), it will confirm more upside towards a target at 20.15, the high of the yer.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
