Mexican Peso rallies after Banxico official’s comments

• The Mexican Peso extends its uptrend after comments from the Deputy Governor of the Bank of Mexico. 
• Irene Espinosa said she advocated for interest rates remaining high as inflation continued to be a problem.
• USD/MXN forms a bearish channel while it continues to descend. 

The Mexican Peso (MXN) edges higher, continuing the steep rally witnessed in most MXN pairs on Friday, after the Deputy Governor of the Bank of Mexico (Banxico), Irene Espinosa, said she thought the Banxico should keep interest rates at their current high level (11.0%) as the battle with inflation was not yet over. 

Her comments were positive for the Mexican Peso as higher interest rates attract more foreign capital inflows. They also contrast with the outlook for many of the Peso’s major peers where earlier interest rate cuts are now either expected or likely.

At the time of writing, USD/MXN is trading at 16.60, EUR/MXN at 18.05 and GBP/MXN at 21.07. 

Mexican Peso boosted by Espinosa comments 

The Mexican Peso continued its short-term uptrend in most pairs on Friday after Irene Espinosa said she did not see any “urgency in cutting interest rates”, according to Milenio.com. She further added that the Banxico’s decision to cut interest rates in March had been “premature”, according to Christian Borjan Valencia, Editor at FXStreet. 

Espinosa's views are consistent with her stance at the Banxico March meeting when she was the only member of the Banxico board not to vote for the decision to cut interest rates by 0.25% from 11.25%. They also contrast with the views of the Governor of the Banxico Victoria Rodriguez Ceja, according to Milenio.com. 

Divergence with major central banks

Espinosa’s stance diverges from the market’s expectations of monetary policy for the central banks of the Peso’s key counterparts – the US Dollar (USD), Euro (EUR) and Pound (GBP). 

Officials at the European Central Bank (ECB) have as good as committed to implementing interest rates cut in June; the Bank of England (BoE) is widely expected to cut rates in August; and whilst officials at the Federal Reserve (Fed) have not been as vocal about wanting to cut interest rates amid persistent inflation, recent lower-than-expected CPI data as well as flat Retail Sales for April, increased bets by futures traders of the Fed cutting rates in September, which currently stand at around 65%, according to the CME FedWatch tool. 

On the economic-data front, the Mexican Peso could experience some volatility after the release of Mexican Retail Sales for March at 12:00 GMT on Monday. 

Technical Analysis: USD/MXN continues descent

USD/MXN – the value of one US Dollar in Mexican Pesos – edges lower on Monday after the steep sell-off at the end of the previous week, as traders continue exerting bearish pressure on the pair. 

USD/MXN 4-hour Chart 

The USD/MXN is falling in a short-term downtrend within a descending channel that favors short bets over longs. 

The next downside target is the conservative price objective calculated for the breakout of the mid-April to May range. This is situated at 16.54, the 0.618 Fibonacci ratio of the range's height extrapolated lower. Further bearishness could even see USD/MXN reach 16.34, the full height of the range extrapolated lower. 

The pair is meeting support at the lower base of the channel and could pull back before its next descent. 

The Relative Strength Index (RSI) momentum indicator is signaling oversold conditions, which indicates traders should not add to their short positions. If the RSI exits oversold and returns to neutral territory above 30, it would be a signal to close those positions as a correction is probably underway. Once the correction ends, however, the descending channel is expected to continue taking prices lower. 

Given the medium and long-term trends are also bearish, the odds further favor more downside.