Mexican peso rises for fourth straight day after Banxico cut

• Mexican peso demand rises despite Banxico’s surprise decision.
• Banxico cuts rates by 25 bps in a split 3-2 decision.
• The central bank signals further easing despite inflation risks and growth concerns.
• Core inflation continues to decline, expected to fall below 4% by Q4 2024.

The Mexican peso advanced for the third consecutive day after a surprise monetary policy decision by the Bank of Mexico (Banxico). The bank decided to cut borrowing costs, despite earlier revelations that inflation was above 5.50%. USD/MXN, instead of rising sharply, pulled back and traded at 18.79, down 0.38%.

On Thursday, Banxico decided to cut borrowing costs in a split 3-2 decision by the Board of Governors. Governor Victoria Rodriguez Ceja and Vice Governors Galia Borja and Omar Mejia favored a 25 basis point (bps) cut, while Irene Espinosa and Jonathan Heath voted to keep rates unchanged.

The statement was little changed compared to the previous two meetings, but they reiterated: “Looking ahead, the Council anticipates that (the) inflationary environment may allow for discussion of policy rate adjustments,” meaning further easing is ahead.

The central bank acknowledged that inflationary risks remain tilted to the upside, while growth is tilted to the downside.

Banxico’s board updated its inflation forecast, indicating that headline inflation is expected to rise in the short term but remain unchanged in the long term. Core inflation is expected to ease and fall below 4% in the fourth quarter of 2024.

In its monetary policy statement, Banxico officials commented that despite July inflation rising to 5.57%, the core figures “which better reflect the trend of inflation, accumulated eighteen consecutive months of cuts, registering 4.05% .

Overall, the US economic record is limited. However, Boston Fed President Susan Collins expressed that it is appropriate to start easing soon if the data is as expected. Collins sees the timing of data as critical to the Fed’s policy decision-making.

Daily market reasons: Mexican peso rises as traders shrug off Banxico’s discount

• Banxico’s board revealed that the Consumer Price Index (CPI) is expected to rise to 5.2% in Q3 and fall to 4.4% in Q4, both readings for the rest of 2024. They expect that will reach 3% plus or minus 1.% target by Q4 2025.
• Core CPI is forecast to reach 3.9% in Q4 2024 and reach 3% by the end of next year.
• Mexico’s inflation rate rose 1.05 percent on the month, beating estimates of 1.02 percent and significantly higher than June’s 0.38 percent. In the 12 months to July, inflation rose from 4.98% to 5.57%, in line with expectations.
• Core prices rose from 0.22% to 0.32% on the month, beating economists’ forecasts of 0.29%. However, on an annual basis, inflation missed the consensus of 4.02% but eased slightly to 4.05%, showing an improvement from June’s 4.13%.
• Mexico’s industrial production fell from 0.7% to 0.4% on the month, but beat estimates of 0.3%. On an annual basis, it fell more than the expected -0.1% from last year and came in at -0.7%, further confirming that the economy is stagnating.
• The CME FedWatch tool puts the odds of a 50 basis point Fed rate cut at its September meeting at 52.5%, down from 57.5% a day ago.

Technical Analysis: Mexican Peso Appreciates Further as USD/MXN Falls Further Below 19.00

USD/MXN extended its losses to a six-day low of 18.76, but the pair remains biased to the upside. Although the momentum supports the Peso’s recovery, breaking the next support at 18.59, the June 28 top would be difficult as it is above the psychological threshold of 18.50.

On the other hand, if buyers limit USD/MXN’s downside and lift the exchange rate above 19.00, this will pave the way for a recovery. The next resistance of the exotic pair would be 19.50, followed by the key mark of 20.00. A decisive break will expose the YTD high at 20.22, followed by the 20.50 mark.