USD/MXN Drops on Unexpected Banxico Rate Hold


Banxico, USD/MXN, Covid – Talking Points

  • Bank of Mexico leaves rates unchanged at 4.25% versus 4.00% expected
  • USD/MXN falls as Peso strengthens on the hawkish move from Banxico
  • Risks to outlook and inflation remain dependent on Covid

The Bank of Mexico held its benchmark interest rate on Thursday. The hold on cutting rates was outside of economists’ expectations that called for a 25 basis point cut, although some economists forecasted rates to remain unchanged. USD/MXN price action fell as the decision crossed the wires, but pivoted to retrace a portion of the early reaction. The Mexican Peso is nearly 20% higher against the US Dollar since April when Covid caused a rush for US Dollars.

USD/MXN 1-Min Chart

Chart created with TradingView

Today was the last meeting where a rate cut was expected from economists. Overnight index swaps also see no rate cuts going forward. Peso strength recently eased on weak industrial production data but continues to be one of the best-performing currencies in emerging markets. Going forward, the Peso may also benefit from the incoming Biden Admiration, which many expect to boost a better relationship than the current White House, although debate remains over the election outcome regarding legal challenges.

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In line with other central banks, today’s policy statement from Banxico cites a heavy dependence on Covid affecting the economic outlook and inflation. The outlook for inflation is expected to be near 3% over the next 2 years. Currently inflation is above target with food prices being a main driver since Covid. Risks to the outlook include continued social distancing affecting consumer consumption, FX depreciation, and other factors, mainly related to the current pandemic.

The decision was split today at 4-1. Given the hawkish decision to hold rates, USD/MXN may head lower as the decision is priced into markets in the coming days. The technical setup for USD/MXN is nearing its price level seen before the Covid pandemic. A drop near the 20 handle would see price meet an area of prior resistance set in 2019. However, the overall trend lower remains intact with the 20- and 50-day moving averages heading lower.

USD/MXN Daily Price Chart

USDMXN Price Chart

Chart created by TradingView

Written by Thomas Westwater, Analyst for DailyFX.com

Contact Thomas at @FxWestwater

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