Mexican Peso drops as Banxico lowers rates, hints at more to come

• Mexican Peso drops nearly 1% as traders brace for Banxico’s rate cut and digest US trade shock.
• Trump enacts 25% tariffs on all auto imports, hitting major suppliers like Mexico and spooking EM currencies.
• USD/MXN surges to 20.36 as tariff fallout combines with looming 50 bps Banxico rate cut expectations.

The Mexican Peso is feeling the pain of tariffs, depreciating for the second consecutive day against the US Dollar after US President Donald Trump signed an executive order to apply tariffs on auto imports from all countries. The USD/MXN trades at 20.28, up almost 1%.

Recently, Banco de México (Banxico) reduced its interest rate by 50 basis points, from 9.50% to 9% unanimously and opened the door for additional adjustments to calibrate monetary policy and make similar adjustments. Banxico highlighted that the disinflation process is evolving, opening the door to continued easing of monetary policy, with the board expecting to reach its 3% inflation target by Q4 2026.

On Wednesday, Trump signed an executive order adding 25% duties on imported automobiles, effective on April 2. He said that he would announce additional tariffs next week.

In 2024, the US imported $474 billion worth of automotive products, including passenger cars valued at $220 billion. Mexico, Japan, South Korea, Canada and Germany were the biggest suppliers.

Hence, the Mexican Peso immediately plunged after the news late Wednesday but extended its losses during Thursday’s session with the USD/MXN hitting a two-week high of 20.36.

Traders brace for Banco de Mexico’s (Banxico) policy decision. Analysts expect a 50-basis-point (bps) rate cut due to the evolution of the disinflation process and forward guidance provided by the central bank. It should be noted that in February’s meeting, Banxico lowered rates in a 4-1 vote. Jonathan Heath was the dissenting vote, favoring a 0.25% cut.

Across the border, US economic data showed that the labor market remains solid as Initial Jobless Claims dipped compared to the previous reading in the week ending March 22. The final reading of the Gross Domestic Product (GDP) was within estimates, and Pending Home Sales improved in February, compared to the previous reading.

Ahead this week, the US schedule will feature the release of the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index.

Daily digest market movers: Mexican Peso drops ahead of Banxico’s meeting

• The Citi Expectations Survey indicates that private economists anticipate Banxico will reduce rates by 50 basis points in March with estimates suggesting Mexico’s primary reference rate will conclude 2025 at 8%, down from 8.25%.
• The same survey projects that inflation expectations are anchored in the high 3% range, while GDP is forecast to expand by 0.6%, down from 0.8% in the last survey.
• The USD/MXN is projected to finish at 20.98 in 2025, down from 21.00 in the last poll.
• US Initial Jobless Claims for the week ending March 22, increased below estimates of 225K, reaching 224K in the week ending March 22.
• US GDP for Q4 2024 final reading was confirmed at 2.3% QoQ (QoQ), up from 1.9%, slightly below estimates of 2.4%.
• Pending Home Sales dipped 3.6% YoY in February, although this improvement was compared to January’s 5.2% plunge.
• Traders had priced the Fed to ease policy by 64 basis points (bps) throughout the year, according to data from the Chicago Board of Trade.

USD/MXN technical outlook: Mexican Peso plunges as USD/MXN rises past 20.25

The USD/MXN uptrend resumed on Wednesday and extended into Thursday due to external shocks closely linked to the Mexican economy. The exotic pair is testing key resistance at the confluence of the 50-day and 100-day Simple Moving Averages (SMA) near 20.35/36. Momentum supports buyers as the Relative Strength Index (RSI) turned bullish.

Therefore, once that area is surpassed, the next stop would be the 20.50 psychological mark, ahead of testing the March 4 peak of 20.99, followed by the year-to-date (YTD) high of 21.28.

Conversely, the USD/MXN must drop below 20.20 for sellers to have a chance to drive the exchange rate toward the 20.00 figure. If hurdled, the next support would be the 200-day SMA at 19.72.