Mexican Peso looking for direction after Banxico’s dovish hints

• The Mexican Peso recovers the losses made following the Banxico meeting on Thursday. 
• A change in the distribution of voting and language of the statement suggests a higher change of interest-rate cuts in the future. 
• USD/MXN trades in volatile ups and downs with no clear trend in the short-term.

The Mexican Peso (MXN) recovers most of the losses it endured after the Bank of Mexico (Banxico) meeting on Thursday. Banxico decided to leave interest rates unchanged at 11.00% and although the decision was widely expected, the change in the language of the statement and the division of voting were not. 

These changes suggest Banxico is more likely to cut interest rates in the future than was previously supposed (dovishness). This, in turn, had a moderately weakening effect on the Mexican Peso, since lower interest rates are generally bearish for currencies because they attract lower foreign capital inflows. 

At the time of writing, one US Dollar (USD) buys 18.36 Mexican Pesos, EUR/MXN is trading at 19.64, and GBP/MXN at 23.21.

Mexican Peso weakens after changes to voting and Banxico language

The Mexican Peso recovers the losses incurred following the Banxico policy meeting. Several changes to the language of the accompanying statement and the inclusion of a single vote to cut interest rates – by Omar Mejia – were new developments that gave the meeting a dovish slant. 

The key changes to the statement were as follows: 

• At the previous meeting one member had voted to raise interest rates by 0.25%, in contrast at the June meeting a member voted to cut interest rates by 0.25%. 
   
• Overall it gave little weight to the Peso’s devaluation, according to analysts at Rabobank.
   
• “Of note was the seemingly little weight the Bank placed on recent MXN depreciation filtering through to higher inflation. Overall, we would argue there is a dovish tilt that leaves the door wide open to further rate cuts this year,” Rabobank said in its note.
   
• Nevertheless, near-term inflation forecasts were revised up due to pass-through from the weaker Mexican Peso, however, longer-term forecasts were left unchanged.
   
• New language was added about economic activity slowing down, including “the balance of risks to growth of economic activity is biased to the downside”.
   
• The same mention of slowing activity preceded the interest-rate cut in March, according to economists at advisory service Capital Economics.
   
• Further, Banxico added that it saw scope for, “discussing reference rate adjustments”.
   
• “Our sense is that policymakers have opened the door to a 25bp cut at the August meeting,” said Capital Economics, adding “Even so, once the easing cycle is resumed, we expect that rates will be lowered more gradually than most anticipate.”
   
• Rabobank expects two 0.25% rate cuts from Banxico in 2024, with a policy rate of 10.50% to end the year.
   
• Capital Economics are more dovish, expecting four rate cuts and an end-of-year policy rate of 10.00%. 

Technical Analysis: USD/MXN displays volatility 

USD/MXN rose after the Banxico meeting to touch a weekly high of 18.60, however, it has since fallen back down to the 18.30s. 

The pair moved up after the formation of a three-wave ABC correction. This suggests the possibility the pair might not be correcting the short-term downtrend but instead has entered a short-term uptrend. 

USD/MXN 4-hour Chart 

However, the evidence is not strong either way and ultimately the direction of the short-term trend is unclear at the moment.  

A move below 18.06 (June 26 low) would suggest the downtrend was resuming and probably see a continuation down to 17.87 (June 24 low).

Alternatively, if USD/MXN rallies and breaks above 18.60 (June 28 high), it is likely to continue up to 18.68 (June 14 high), followed by 19.00 (June 12 high). A break above 19.00 would provide strong confirmation of a resumption of the short-and-intermediate term uptrend.

The direction of the long-term trend remains in doubt.