Mexican peso falls ahead of Banxico decision

• The Mexican Peso has recorded losses in line with the trend established before Banxico’s meeting on Thursday.
• Most analysts expect a moderate 0.25% cut in the central bank’s benchmark interest rate.
• The USD/MXN is steadily rising within its ascending channel, consolidating the overall bullish bias.

The Mexican Peso (MXN) is swinging between slight gains and losses against its major peers on Thursday, ahead of the Bank of Mexico’s (Banxico) monetary policy meeting scheduled for 19:00 GMT. Since interest rate changes can have a high impact on exchange rates, this is likely to be the most important event for the currency this week.

Mexican Peso: Analysts expect 25 basis point rate cut today

The Mexican Peso will be in the spotlight today as Banxico meets to discuss monetary policy and evaluate a cut in its official interest rate.

A reduction in interest rates typically 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 among economists and analysts is that the central bank will opt for a 25 basis point (bps) cut, or 0.25% reduction, in its policy rate, taking it 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 cut of 50 bps (0.50%).

The survey was conducted before Mexico’s inflation data released on Tuesday showed that headline inflation (INPC) over the past 12 months fell to 4.66% in Mexico in mid-September, and core inflation (Subyacente) to 3.95%, according to the National Institute of Statistics Geography (INEGI). The slight decline in inflation may have increased the likelihood of a cut greater than 50 basis points.

That said, data released Monday showed robust retail sales and a larger-than-expected increase in Mexico’s economic activity in July, which would argue for a more moderate reduction in borrowing costs to avoid overheating.

At the August meeting, Banxico decided to cut interest rates by 0.25%. But the decision was a close one. Only three members voted in favor of the cut, compared to two who voted to keep interest rates unchanged. The fact that it was not unanimous increases the likelihood of a smaller cut of 25 bps over a larger reduction of 50 bps.

“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 persistent inflation, but also the fact that the data from the real economy, although pointing to a slowdown, do not indicate a significant economic downturn. All in all, Banxico is likely to cut rates by another 25 basis points today,” the analyst adds.

Technical Analysis: USD/MXN starts to rise again within the channel

The USD/MXN is moving up within its ascending channel, continuing the bullish bias of the past few months. Overall, it is in a short, medium and long-term uptrend. Given the theory that “the trend is your friend”, it is more likely to continue rising.

USD/MXN Daily Chart

Wednesday’s close above 19.53 (August 23 high) provides further bullish confirmation that the pair has established a short-term bullish bias after recently bottoming at the base of the ascending channel.

If it can break above 19.68 (the high from September 25), it will confirm further upside towards a target at 20.15, the high of the year.