Mexican peso falls as Banxico rate cut expectations weigh on

• Mexican peso falls as USD/MXN climbs over 1.40%, driven by expectations of further Banxico rate cuts.
• The cooling of inflation in early September supports the case for a Banxico rate cut at the September 26 meeting.
• Bloomberg poll: 20 out of 25 analysts expect Banxico to cut 25 bps to 10.50%, with some predicting a 50 bps cut.

The Mexican peso tumbles against the greenback on Wednesday as the latter appreciates sharply against most emerging market currencies. There are expectations for further easing by the Bank of Mexico (Banxico) at its September 26 meeting. This environment sponsored an advance in the exotic pair. At the time of writing, USD/MXN is trading at 19.58, a gain of over 1.40%.

Mexico’s economic record was absent on Wednesday, but data released on Monday and Tuesday painted a mixed economic picture. In annual data, Economic Activity improved in July, but Retail Sales extended its agony to three straight months of negative records.

On Tuesday, the Instituto Nacional de Estadistica Geografía e Informatica (INEG) announced that monthly and annual inflation figures for the first half of September decreased.

The latest set of data should allow Banxico to cut its interest rate by at least 25 basis points (bps) on Thursday. According to Bloomberg, 20 out of 25 analysts expect the central bank to cut borrowing costs to 10.50%. One expects rates to remain unchanged and four forecast a 50 bps rate cut, following the Fed.

If Banxico eases its policy, that would be negative for the Peso. Therefore, USD/MXN could extend its uptrend, with traders eyeing the psychological figure of 20.00.

Christian Lawrence, senior cross-asset strategist at Rabobank, noted: “We see room for downside crises on the back of tactical carry trade flows during periods of volume suppression. However, our basis is for further MXN weakness in the coming months as US reforms and elections add to MXN risk premiums.”

Meanwhile, data from the United States (US) shows that although the economy is slowing, most market participants are predicting a soft landing scenario. On Tuesday, the Conference Board (CB) revealed that consumer sentiment in September deteriorated and hit its lowest level since August 2021 at 98.7, down from 105.6.

Daily Market Reasons: Mexican Peso Falls Amid Limited Economic File

• USD/MXN extended its rise on Banxico rate cut expectations alongside greenback recovery.
• The U.S. dollar index ( DXY ), which tracks the greenback’s performance against a basket of six pairs, is up 0.56% to change hands at 100.91.
• Banxico is expected to cut borrowing costs by 175 bps by the end of 2025, according to swap markets.
• Market participants have fully priced in a 100% chance of a 25 bps rate cut by the Fed. However, the odds for 50 bps of easing are 60.8%, according to the CME FedWatch tool.

USD/MXN Technical Analysis: Mexican peso falls as USD/MXN breaks above 19.50

USD/MXN resumed its uptrend on Wednesday and hit a daily high of 19.64 before stabilizing at current levels. Momentum favors further upside as the Relative Strength Index (RSI) is bullish.

The first key resistance level for buyers to overcome is the August 6 high at 19.61. Once broken, the next stop is 20.00, followed by the yearly (YTD) high at 20.22.

On the other hand, if sellers drive USD/MXN below the September 23 low of 19.29, it will expose the confluence of the 50-day simple moving average (SMA) and the September 18 low between 19.08 and 19.06.