Mexican Peso trades higher after release of Banxico minutes

• The Mexican Peso is edging higher on Friday after the release of the March meeting minutes. 
• Higher Crude Oil prices, a key Mexican export, could also be supporting the Peso. 
• Technically the USD/MXN pair remains in a long-term downtrend. 

The Mexican Peso (MXN) trades marginally higher against the US Dollar (USD) on Friday, after the release of the Banco de Mexico’s (Banxico) March meeting minutes and amid a rise in Crude Oil prices, a key export for Mexico. 

The Banxico minutes revealed a reluctance on the part of policymakers to embrace a cycle of easing, including a commitment to lowering interest rates in the future, due to continued stubborn inflation. 

The prospect of interest rates remaining high in Mexico – they are currently at 11.00% – supports the Mexican Peso as it leads to higher foreign capital inflows.

Higher Crude Oil prices, with Brent Crude Oil pushing above $90 a barrel on Friday, may also have helped the Mexican Peso, given its importance as an export. 

Mexican Peso supported by hawk found in Banxico

The Mexican Peso finds support and recovers after the release of the minutes of the Banxico March meeting. 

Although the majority of members voted to cut interest rates by 0.25% to 11.00%,  one policymaker, Irene Espinosa, voted against the cut. 

Key takeaways:

• In summary, the minutes highlighted how inflation, particularly in the services sector, remained stubbornly high and interest rates would therefore need to remain elevated to bring it back down to the bank’s 3.0% target.
   
• Members considered that the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside.
   
• It was acknowledged that although inflation remained sticky the current environment was less adverse than that faced in 2022 and the first months of 2023.
   
• Members observed that long-term inflation expectations drawn from the survey conducted by Banco de México remain anchored at 3.5% – above Banxico's 3.0% target.
   
• It was agreed that monetary policy should remain restrictive and therefore conducive to the convergence of inflation to the 3% target in the forecast horizon.
   
• Future decisions will be data-dependent.
   
• One member noted that “despite monetary restriction, domestic economic activity continues showing resilience and that demand related pressures may slow down or even reverse the fall in inflation.
   
• Further, it was noted that “economic activity continues exhibiting dynamism despite the historical increase in the real interest rate.” 

Mexican Peso sensitivity to risk aversion       

The Mexican Peso is biased to depreciate according to data from the foreign exchange derivatives market, according to commentary from one member of the Banxico. MXN is also particularly sensitive to depreciating during periods of high risk aversion, the Banxico meeting minutes said. 

“The reduction in exchange rate volatility and in the implied skew in foreign exchange options suggest a lower demand for hedging amid a possible depreciation of the Mexican peso, which contrasts with other election years,” said the member, who was not named. 

“Lower demand, as well as the positioning observed in short-term foreign exchange derivatives markets, could magnify a depreciation of the Mexican peso in the event of an episode of high-risk aversion, and thus periods of volatility cannot be ruled out,” the member added.  

Technical Analysis: USD/MXN in long trend lower

USD/MXN is in a long-term downtrend that is exhibiting signs of waning pressure. The bear trend started after the pair peaked at 25.76 in April 2020 – we are now in the 16.50s. 

It is possible the pair is unfolding a very large three-wave pattern called a Measured Move. Such patterns are composed of an A, B, and C wave, with wave C extending to a similar length to wave A, or a Fibonacci 0.618 ratio of A. 

USD/MXN Weekly Chart 

If this is the case, price has almost reached the point at which C will equal A, calculated as lying at 15.89. 

It has also by now surpassed the conservative target for the end of C at the 0.618 Fibonacci extension of A (at 18.24). 

Once the pattern is complete the market usually reverses or undergoes a substantial correction. 

The Relative Strength Index (RSI) is converging acutely with price – a sign the downtrend could be losing momentum. In 2024 price has pushed below the level of the 2023 lows but RSI has not followed suit. This non-correlation between price and momentum is a bullish indication. It could lead to a correction higher eventually. 

There has been no reaction from price yet, however, so the expectation of upside remains speculatory and unconfirmed. 

An actual turnaround in the price would be required to support the view a change is on the horizon, and that is still lacking.