USD/MXN Shows Limited Reaction to Banxico's 50bp Rate-Hike
- Banxico hikes overnight rate by 50bps to 4.75% in line with market consensus
- Recent MXN weakness has increased worries over inflation
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After convening for its September Policy Meeting, Mexico’s Central Bank opted to increase its benchmark rate by 50bps to 4.75% in a preemptive approach to shore up the domestic currency that has been battered by concerns over the U.S. Presidential Elections in November.
Market participants surveyed by Bloomberg News had anticipated, by a slight majority, that Banxico would pull the trigger and deliver another half a percentage point rate hike to ensure inflation-expectations remain anchored in light of the prolonged weakness in the local currency. Nevevertheless, the Central Bank appears to be taming market expectations, with the policy statement indicating that the decision to hike rates is not part of a tightening cycle. At the same time, policy makers noted that the U.S. Presidential Election continues to be an important risk factor for the Mexican economy as recent opinion polls highlight a narrowing race.
Prior to the policy decision, Banxico had already increased rates twice in 2016, first in an unscheduled meeting in February and then in June; each time by 50bps amid concerns that persistent depreciation in the Peso would stoke inflationary pressures.
Chart 1: USD/MXN 1-minute Chart Intrday (September 29, 2016)
After the policy announcement USD/MXN channeled lower, falling as as low to 19.3833 as the decision to hike rates boosted appetite for the Mexican currency. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.
--- Written by Diego Colman, DailyFX Research
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