Mexican Peso fluctuates between gains and losses after Banxico decision to cut interest rates

The Mexican Peso seesaws between tepid gains and losses following the Bank of Mexico (Banxico) meeting.
The bank decided to cut interest rates by 25 bps and revised down its forecasts for inflation.
USD/MXN steadily climbs within its rising channel.

The Mexican Peso (MXN) fluctuates between tepid gains and losses in its major pairs on Friday, a day after the Bank of Mexico (Banxico) policy meeting at which the bank decided to cut interest rates by 25 basis points (0.25%), bringing the official cash rate down to 10.50% from 10.75% previously.

Changes to interest rates can have a high impact on exchange rates. However, the cut was in line with consensus expectations, so the Peso remained relatively stable following the announcement.

Revisions to Banxico’s forecasts for the economy, however, suggest more interest rate cuts are probably on the way, with potentially negative implications for MXN.

Mexican Peso weighed by downwardly revised inflation forecasts

The Mexican Peso ended the day little-changed following the Banxico interest-rate decision, closing Thursday close to where it started in its major pairs.

The bank decided to cut interest rates by 25 bps to 10.50% as expected, with four of the members of the board voting in support of the decision and one dissenter – Jonathan Heath – voting to keep rates unchanged.

Banxico did, however, revise down its inflation forecasts in light of recent data that showed a cooling in price pressures. It forecast headline inflation (INPC) at 5.1% in Q3 of 2024, down from 5.2% in the August policy statement, and at 4.3% instead of 4.4% in Q4. As for core inflation, the bank saw it falling to 3.8% in Q4 of 2024, below the 3.9% in the previous forecast, and to 3.5% in Q1 of 2025, down from 3.6% previously.

The Banxico statement noted that “Mexico’s economy is undergoing a period of weakness” and that the balance of risks to growth remains to the downside.

With lower inflation expected and doubts over economic growth, the forecast revisions suggest a greater likelihood of the Banxico making more cuts to interest rates in the future.

“We are forecasting two more 25bp cuts this year at the November 14th and December 19th meetings, respectively, bringing the year-end rate to 10.00%. This in addition to a total of 200 bps cuts throughout next year,” said Rabobank in a note.

Advisory service Capital Economics were of a similar view stating: “Overall, we expect two more 25bp interest rate cuts over the rest of the year, to 10.00%. The easing cycle is likely to be a bit more stop-start next year as it takes time for inflation to fall to the central bank's 2-4% target. Our end-2025 forecast of 8.50% is above consensus expectations,” said Liam Peach, Senior Emerging Markets Economist.

Technical Analysis: USD/MXN continues steady rise within channel

USD/MXN continues to trade within its rising channel as it extends the uptrending 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

Thursday’s close above 19.63 (September 25 high) provided more bullish certainty of the pair’s near-term upside bias after it recently bottomed out at the base of the rising channel, towards a target at 20.15, the high of the year.

A further break above 19.75 (the September 26 high) would create a higher high and provide yet more proof of an extension of the uptrend.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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.

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