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USD/MXN Holds Near August Low as Banxico Holds Overnight Rate at 4.25%

USD/MXN Holds Near August Low as Banxico Holds Overnight Rate at 4.25%

Diego Colman, Market Analyst

Talking Points:

- Banxico maintains the overnight rate unchanged at 4.25% in line with market expectations.

- USD/MXN rises after Banxico indicates growth balance of risks have deteriorated

- Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series

As broadly anticipated, Banxico opted to maintain the key overnight rate unchanged at 4.25% after convening for its August monetary policy meeting. The central bank struck a cautious tone, with the statement highlighting growing concerns surrounding the pickup in core-inflation measures.

Banxico stressed the risks surroduning the inflation outlook due to the Fed nomalization cycle along with the US presidential election in November, which could add downside pressure to the domestic currency, but the tone suggests the central bank will stick to the sidelines for the foreseeable future amid the uncertainty surrounding the economic outlook.

USD/MXN Holds Near August Low as Banxico Holds Overnight Rate at 4.25%

Banxico last removed policy accommodation in June when, in an unexpected move, the central bank decided to increase the benchmark rate by 50bps to 4.25% to contain the depreication in the local currency amid fears that persistent weakness in the Mexican Peso would drive up inflation-expectations and fuel price pressures.

Prior to that, the central bank caught market partiicpants by surprise in February by suddenly raising interest rates by half a percentage point at an unscheduled meeting. The move, at the time, aimed to curtailprice growth and to ensure inflation-expectations remained anchored after USD/MXN broke above 19.0000 to mark fresh record-high exchange rates.

Chart 1: USD/MXN 1-minute Chart Intraday (Aug 11, 2016)

USD/MXN Holds Near August Low as Banxico Holds Overnight Rate at 4.25%

Immediately after the monetary policy decision announcement, USD/MXN rose as high as 18.2067 as the policy statement failed to be hawkish enough and did not explicitly suggest that Banxico was considering making another preemptive move (hike) like the one in June. By the time this report was written,however, the pair had settled near 18.1838. With FX volatility set to remain high, it may be the right time to review risk management principles to protect your capital.

Read more:USDOLLAR Index Yo-Yos; Aussie and Kiwi Break Conventional Wisdom

--- Written by Diego Colman, DailyFX Research

For comments or questions regarding this article, e-mail instructor@dailyfx.com

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

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