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USD/MXN: Peso Eyes Mexico Central Bank Interest Rate Decision

USD/MXN: Peso Eyes Mexico Central Bank Interest Rate Decision

2019-08-14 20:18:00
Rich Dvorak, Junior Analyst
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USDMXN, MEXICAN PESO, BANXICO RATE DECISION

  • USDMXN overnight implied volatility spikes to a multi-month high ahead of the interest rate decision from Banco de Mexico
  • The Mexican Peso could extend its downside against the US Dollar if Mexico’s central bank cuts interest rates
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Spot USDMXN has soared well over 3% so far this month with the Mexican Peso – alongside other Emerging Market currencies – sinking in response to widespread risk aversion recently exhibited by market participants. Uncertainty surrounding the US-China trade war and global GDP growth prospects have weighed negatively on risk appetite and economic activity which Mexico is far from immune to.

In fact, we highlighted our bullish outlook on spot USDMXN citing a series of sharp downward revisions to Mexico GDP forecasts amid rising political uncertainty with the abrupt resignation of Mexico’s Minister of Finance. Now, forex traders will shift attention to Banco de Mexico (Banxico) – Mexico’s central bank – for its latest monetary policy update slated for release Thursday at 18:00 GMT.

USDMXN RISK REVERSAL SUGGESTS UPSIDE BIAS AHEAD OF BANXICO RATE REVIEW

Mexican Peso Risk Reversal Chart at Risk Ahead of Banxico Interest Rate Decision

According to Bloomberg’s survey of economists, less than half of the 23 respondents are expecting Banxico to cut its key overnight interest rate from the current 8.25% level. Although, President Andres Manuel Lopez Obrador (AMLO) has recently stated that the country’s interest rates are too high for Mexico’s slowing economy and would like to see Banxico cut rates to boost growth.

If Mexico’s central bank shocks markets with a surprise rate cut, it will be the first time Banco de Mexico lowers interest rates since June 2014. Currency option traders are positioning ahead of Banxico’s rate decision with a bullish bias on spot USDMXN judging by the latest 25-delta overnight risk reversal data which was last clocked at 0.895.

USDMXN PRICE CHART: DAILY TIME FRAME (JANUARY 2019 TO AUGUST 2019)

Spot USDMXN Price Chart Technical Analysis

USDMXN has already begun to stage a bullish breakout above its downtrend line extended from the December 2018 and June 2019 swing highs. Yet, spot USDMXN has struggled to reclaim the 19.800 price level with hopes that legislators will soon approve the USMCA trade deal which has largely kept the Mexican Peso afloat. That said, USDMXN overnight implied volatility of 14.31% can be used to calculate its estimated 1-standard deviation trading range of 19.509-19.804 which, statistically speaking, encompasses spot price action with a 68% probability.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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