Mexican peso falls as inflation data fuels expectations of Banxico rate cut

• The Mexican peso is on the defensive as September inflation targets Banxico’s 3% target.
• Banxico is expected to cut rates further after a cut to 10.50% in September, with further easing projected until the end of 2024.
• Traders await the release of the Fed’s September meeting minutes and the US CPI report on Thursday as US Treasury yields and the dollar rise.

The Mexican peso depreciated against the US dollar on Wednesday after an inflation report opened the door for more easing by the Bank of Mexico (Banxico). Traders are also watching the release of the minutes of the Federal Reserve’s (Fed) September meeting for clues on the path of monetary policy. USD/MXN is trading at 19.40, up over 0.40%.

Mexico’s inflation eased in September, according to the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). The headline and core consumer price index (CPI) were below estimates and trending towards Banxico’s target of 3% plus or minus 1%.

USD/MXN aimed higher as data suggests Banxico may be more aggressive in its easing cycle. On Monday, Banxico Governor Victoria Rodriguez said the board could consider further cuts to its benchmark rate while speaking to Reuters.

Banxico cut rates to 10.50% in September and expects to cut by at least 50 additional basis points (bps) towards the end of 2024. The next meetings are on November 14 and December 19.

The minutes of the September 17-18 Fed meeting are expected in the US and will appear in the afternoon session. Fed Governor Michele Bowman was the lone dissenter who voted for a 25 bps rate cut. According to Brown Brothers Harriman analysts, “the minutes could reveal that other Fed officials balked at 50bp before being persuaded to vote with the majority.”

Following last Friday’s non-farm payrolls (NFP) report, Fed officials took a more cautious stance. On Tuesday, Vice President Philip Jefferson said he remains dependent on the data and that his approach will be meeting-by-meeting. Boston Fed President Susan Collins said further tapering was likely needed, but it would be data-driven.

Meanwhile, the U.S. dollar index ( DXY ), which tracks the greenback’s performance against six other currencies, rose 0.37 percent to 102.85, supported by rising U.S. Treasury yields.

Daily Market Reasons: Mexican Peso Falls on Inflation Report

• Last Thursday, Mexico’s Supreme Court voted eight to three to “consider a constitutional challenge to the controversial judicial review passed last month,” which would allow Supreme Court judges and magistrates to be chosen by electoral vote.
• Mexico’s CPI fell in September from 4.99% to 4.58% on the year, beating estimates of 4.62%. Monthly inflation was 0.05%, below forecasts of 0.1%.
• Core CPI rose 3.91% YoY, below forecasts of 3.95%. Monthly core inflation was 0.28%, up from 0.22% but below estimates of 0.32%.
• According to the Banxico survey, the central bank is expected to cut rates by 50 bps to 10% for the rest of 2024. Meanwhile, the USD/MXN exchange rate will close at around 19.69.
• Mexico’s economy is expected to grow 1.45% in 2024, down from August’s 1.57%.
• Data from the Chicago Board of Trade (CBOT) via the fed funds rate futures contract in December show that investors expect 48 bps of easing by the Fed towards the end of 2024.
• Market participants ignored a 50 bps cut. The odds of a 25 bps cut are 81.4%, while the odds of keeping rates unchanged are 18.6%, according to CME FedWatch Tool data.

USD/MXN Technical Outlook: Mexican Peso Extends Losses as USD/MXN Rises Above 19.40

USD/MXN has regained its 50-day simple moving average (SMA) at 19.37, which could open the door for further upside. Momentum favors buyers as shown by the bullish relative strength index (RSI) reading. Therefore, the exotic pair is heading up.

If USD/MXN breaks above the psychological level of 19.50, look for buyers driving the exchange towards the daily high of 19.82 on October 1 before 20.00. Next will be the YTD peak of 20.22.

For a bearish resumption, if USD/MXN breaks below the October 4 wing low of 19.10, the 19.00 figure will be exposed. Once broken, the next support would be the 100-day SMA at 18.64.