Mexican Peso edges higher prior to Banxico decision

The Mexican Peso edges higher 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) makes small gains 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.

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.

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