USD/MXN rises over 1.40% ahead of the September 26 meeting of the Bank of Mexico
The Mexican Peso saw a significant decline against the U.S. Dollar on Wednesday, with the USD/MXN exchange rate climbing more than 1.40%. This sharp movement comes as expectations grow for a potential rate cut by the Bank of Mexico (Banxico) in its upcoming meeting on September 26, 2024. The exchange rate reached 19.58 during trading, driven by increasing anticipation of further monetary easing from the central bank.
Banxico Rate Cut Speculation Grows
The focus on Banxico’s upcoming meeting intensified following recent data that supports the likelihood of a rate reduction. A Bloomberg survey revealed that 20 of 25 analysts expect a 25-basis point (bps) cut, which would bring the benchmark interest rate down to 10.50%. Some analysts even predict a more substantial 50-bps reduction, aligning with the recent actions by the U.S. Federal Reserve.
Slowing inflation in early September has bolstered the case for an easing of monetary policy. The National Institute of Statistics, Geography, and Informatics (INEGI) reported earlier this week that both monthly and annual inflation figures for the first half of September had declined. This drop in inflation adds further weight to predictions that Banxico may reduce borrowing costs to stimulate economic growth.
Mixed Economic Indicators
While Banxico considers its next move, Mexico’s economic data offers a mixed picture. On Monday, annual data indicated an improvement in Economic Activity for July, suggesting some resilience in certain sectors. However, Retail Sales continue to paint a more pessimistic picture, with figures extending into a third consecutive month of negative readings.
With these contrasting indicators in play, Banxico’s decision on September 26 will be closely watched. Should the central bank opt for a 25-bps cut as expected, it would be the first easing of monetary policy after a long period of rate stability aimed at curbing inflation.
Global Context and the U.S. Dollar’s Strength
The Peso’s decline is not occurring in isolation. The U.S. Dollar has appreciated sharply against most emerging market currencies, including the Mexican Peso, as expectations rise for more easing from Banxico. The USD/MXN has been climbing, with momentum indicating further potential for the exchange rate to continue rising. The psychological 20.00 mark is now in traders’ sights, especially as the Dollar strengthens globally.
The U.S. Dollar Index (DXY), which measures the greenback’s performance against a basket of six major currencies, rose by 0.56%, reaching 100.91. While the U.S. economy shows signs of slowing, with Consumer Confidence hitting its lowest point since August 2021, many analysts foresee a soft landing, providing support for the Dollar.
Christian Lawrence, senior cross-asset strategist at Rabobank, commented on the trend: “We see room for downside episodes based on tactical carry trade flows during periods of volatility suppression. Still, our basis is for further MXN weakness in the coming months as U.S. reforms and elections boost MXN risk premiums.”
USD/MXN Technical Outlook: Further Upside Likely
From a technical analysis standpoint, the USD/MXN’s current momentum favors further upward movement. The pair hit a daily high of 19.64 on Wednesday before stabilizing at 19.58. Traders are eyeing the next significant resistance level, which stands at the August 6 high of 19.61. If this level is breached, the pair could continue its ascent toward 20.00, followed by the yearly high of 20.22.
However, should sellers push the exchange rate down, key support levels will come into play. The first major support area is at the September 23 low of 19.29. A further decline could expose the confluence of the 50-day simple moving average (SMA) and the September 18 low, which lies between 19.08 and 19.06.
Market Expectations and Fed Policy Impact
In the broader context, market participants are also assessing the impact of U.S. Federal Reserve policy on the Peso. According to the CME FedWatch tool, the market has fully priced in a 100% chance of a 25-bps rate cut by the Fed. However, there is still a 60.8% likelihood of a more aggressive 50-bps easing, which could further drive Dollar strength and weigh on the Mexican Peso.
Looking ahead, Banxico is expected to cut borrowing costs by a cumulative 175 bps by the end of 2025, according to swap markets. This long-term easing outlook aligns with the broader global trend of central banks shifting from a focus on fighting inflation to measures that promote economic growth. Banxico’s upcoming decision will likely be a key turning point for the Peso, especially in relation to the U.S. Dollar.
As the USD/MXN continues its upward trajectory, the market is preparing for the Bank of Mexico’s pivotal decision on September 26. With most analysts expecting a rate cut of at least 25 bps, the Mexican Peso could face further pressure in the coming weeks. Should Banxico follow through on these expectations, the Peso’s decline may deepen, pushing the USD/MXN towards the key 20.00 level. The situation underscores the complex interplay of domestic and global economic forces shaping Mexico’s currency and monetary policy landscape.
USD/MXN rises over 1.40% ahead of the September 26 meeting of the Bank of Mexico
The Mexican Peso saw a significant decline against the U.S. Dollar on Wednesday, with the USD/MXN exchange rate climbing more than 1.40%. This sharp movement comes as expectations grow for a potential rate cut by the Bank of Mexico (Banxico) in its upcoming meeting on September 26, 2024. The exchange rate reached 19.58 during trading, driven by increasing anticipation of further monetary easing from the central bank.
