Mexican peso steady ahead of inflation data, Banxico meeting

• The Mexican peso trades steadily ahead of key inflation data.
• Banxico will hold its meeting on Thursday; a rate cut of 25 bps is expected.
• USD/MXN is rising from the base of a rising channel, supported by firm momentum.

The Mexican peso (MXN) fluctuated between warm gains and losses across its major pairs on Tuesday, ahead of key inflation data later in the day, followed by the Bank of Mexico’s (Banxico) September policy meeting on Thursday – both factors that could influence Mexican currency.

Mexican peso to take into account inflation data, Banxico meeting

The Mexican peso has weakened moderately against both the US dollar (USD) and the British pound (GBP) in recent days, while it has traded mixed against the euro (EUR) as the single currency weakened on Monday due to the rise . fears in the euro area.

The Instituto Nacional de Estadística Geografía e Informática (INEGI) will publish the first half of the month of inflation and core inflation for September at 12:00 GMT on Tuesday.

Data from the previous month showed a 0.03% decline in headline and a 0.1% increase in core inflation. If the new figures are higher, there is a possibility that they will influence the decision of the Bank of Mexico. Higher inflation could increase the likelihood that the Banxico would leave interest rates unchanged, while lower inflation would make it more likely that the central bank would cut interest rates.

Banxico is currently keeping its official interest rate at 10.75%, but this is likely to change after Thursday’s meeting. According to a recent Bloomberg survey, 20 out of 25 economists and bank analysts believe Banxico will continue with a 25 basis point (bps) cut (0.25%). Four analysts expect a cut of 50 bps (0.50%) and only one that the central bank will leave interest rates unchanged. The expectation of lower interest rates is generally negative for a currency because it reduces foreign capital inflows.

“We expect Banxico to cut the policy rate by 25bps from 10.75% to 10.50% at the September 26 meeting,” says Christian Lawrence, Senior Cross-Asset Strategist at Rabobank, in a recent note. “CPI inflation data released since last meeting point to advance on headline after food-induced peak (August at 4.99%) and core inflation has now eased to the top of the Bank’s +/-1pp tolerance band around the 3.% target,” he added.

While some analysts have speculated that Banxico may be dissuaded from cutting rates to support the peso, which has lost more than 10 percent of its value since June, Rabobank does not believe that is the case.

“The recent weakening of the MXN will be of some concern to the bank given the potential move to inflation. However, the moves remain in recent ranges and much of this can be attributed to the slowdown in the carry trade. That said, the perceived increase in the sovereign risk premium could support further structural weakness in the MXN and we would argue that inflation risk in the currency has now reversed to the upside,” says Lawrence.

At the August meeting, Banxico decided to cut interest rates by 0.25%, taking its official rate from 11.00% to 10.75%. The decision, however, was a close call, with only three members voting for the cut to two who wanted to keep rates unchanged.

“Since that meeting, inflation numbers have fallen further,” says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman (BBH). “The next Banxico meeting is on September 26, and if disinflation continues, another 25bp cut to 10.50% looks likely. The swaps market is pricing in 175bp of easing over the next 12 months.”

Technical Analysis: USD/MXN rises, supported by bullish momentum

USD/MXN continues to rise after giving up technical support at the base of a long-term rising channel.

The 50-day simple moving average (not shown in the chart below) also strengthened support at the base of the channel.

USD/MXN 4 Hour Chart

There is a possibility that USD/MXN has started a short-term uptrend within the channel. It is already in a medium to long-term uptrend, so the “current” is flowing north.

The Relative Strength Index (RSI) has risen quite steeply since the September 18 market low, and this is a sign of underlying strength in recovery. The RSI has risen more strongly than the price, which is a sign of bullish convergence.

A close above 19.53 (high since Aug. 23) on a 4-hour basis would further confirm that the pair is in a short-term uptrend, which, given that “the trend is your friend,” it would be expected to continue higher.