Mexican Peso gains as Banxico surprises with rate cut amid rising inflation

• Mexican Peso’s demand increases despite Banxico’s surprising decision.
• Banxico lowers rates by 25 bps in a 3-2 split decision.
• Central bank signals further easing ahead despite inflation risks and growth concerns.
• Core inflation continues to decline, projected to dip below 4% by Q4 2024.

The Mexican Peso advanced for the third straight day following a surprising monetary policy decision by the Bank of Mexico (Banxico). The bank decided to lower borrowing costs despite earlier revelations that inflation had topped 5.50%. The USD/MXN, instead of rallying sharply, retreated and traded at 18.79, down 0.38%.

On Thursday, Banxico decided to lower borrowing costs in a 3-2 split decision among the Governing Council. Governor Victoria Rodriguez Ceja and Deputy Governors Galia Borja and Omar Mejia favored a 25-basis-point (bps) rate cut, while Irene Espinosa and Jonathan Heath voted for keeping rates unchanged.

The statement barely changed compared to the previous two meetings, yet they reiterated, “Looking ahead, the Board foresees that [the] inflationary environment may allow for discussing reference rate adjustments,” meaning that further easing lies ahead.

The central bank acknowledged that inflationary risks remain tilted to the upside, while growth is biased to the downside.

Banxico’s board updated its inflation forecasts, indicating that headline inflation is expected to rise in the short term but remain unchanged in the longer term. Core inflation is projected to edge lower and dip below 4% in the fourth quarter of 2024.

In its monetary policy statement, Banxico officials commented that despite July’s inflation rising to 5.57%, core figures “which better reflects the inflation trend, accumulated eighteen consecutive months of reductions, registering 4.05%.”

Across the board, the US economic docket is scarce. Yet Boston Fed President Susan Collins expressed that it’s appropriate to begin easing soon if the data comes as expected. Collins considers the timing of data as crucial to making Fed policy decisions.

Daily digest market movers: Mexican Peso rises as traders shrugged off Banxico's cut

• Banxico’s board revealed that the Consumer Price Index (CPI) is expected to rise to 5.2% in Q3 and to edge lower to 4.4% in Q4, both readings for the remainder of 2024. They expect it will reach the 3% plus or minus 1% goal by Q4 2025.
• Core CPI is projected to hit 3.9% in Q4 2024 and reach 3% by the end of next year.
• Mexico’s inflation rate rose by 1.05% MoM, exceeding estimates of 1.02% and significantly higher than June’s 0.38%. Over the 12 months to July, inflation increased from 4.98% to 5.57%, in line with expectations.
• Core prices ticked up from 0.22% to 0.32% MoM, surpassing economists' projections of 0.29%. On an annual basis, however, inflation missed the 4.02% consensus but dipped slightly to 4.05%, showing improvement compared to June's 4.13%.
• Mexico’s Industrial Production dipped from 0.7% to 0.4% MoM but exceeded estimates of 0.3%. On an annual basis, it plunged more than the -0.1% YoY projected and came at -0.7%, further confirming that the economy is stagnating.
• The CME FedWatch Tool shows the odds of a 50-basis-point interest rate cut by the Fed at the September meeting at 52.5%, down from 57.5% a day ago.

Technical analysis: Mexican Peso appreciates further as USD/MXN drops further below 19.00

The USD/MXN extended its losses to a six-day low of 18.76, yet the pair remains upwardly biased. Although momentum supports the Peso’s recovery, surpassing the next support at 18.59, the June 28 peak would be difficult as it lies above the psychological 18.50 mark.

On the other hand, if buyers cap the USD/MXN downside and lift the exchange rate above 19.00, this will pave the way for a recovery. The exotic pair’s next resistance would be 19.50, followed by the key 20.00 mark. A decisive break will expose the YTD high at 20.22, followed by the 20.50 mark.