Mexican Peso: USDMXN Ticks Higher on Banxico Rate Cut

Mexico Rate Decision, USD/MXN, COVID-19 – Talking Points

• Bank of Mexico cuts overnight rate by 50 basis points, as expected
• USD/MXN remains near monthly low on USD weakness
• COVID leaves forecast susceptible to high degree of uncertainty

The Bank of Mexico cut its overnight rate by 50 basis points from 5.00% to 4.50% on Thursday, as expected. Price action in USD/MXN saw a slight uptick as the rate cut news crossed the wires but is still near its monthly August low, and appears to be failing to follow through on any strength. The current rate cutting cycle for Banxico now totals 375 basis points since the end of 2018.

USD/MXN 5-Min Price Chart

Source: IG Charts

In line with other central banks, Banxico cited a high degree of economic certainty due to the current virus pandemic. Although, the policy statement did reflect some improvement in conditions, such as positive behavior in global financial markets in response to monetary and fiscal efforts. The policy statement also reflects the rise in annual headline inflation, rising to 3.62% from 3.33%. A rise in energy prices can be attributed partially to that uptick in inflation.

Still, Banxico notes that the current pandemic continues to challenge policy with impacts to economic activity and financial shocks, particularly highlighting the effects on inflation. The 12-24-month forecast laid out in the policy statement aims for inflation around 3% for core and headline figures. The current rise in inflation may pose some challenges for policy makers going forward. And while the last decision for a 50-basis point cut was unanimous, one member voted for a 25-basis point cut in the latest decision, potentially signaling some hesitancy towards the prior unanimously dovish attitude among Banxico members.

--Written by Thomas Westwater, Intern Analyst for DailyFX.com

Contact and follow Thomas on Twitter @FxWestwater