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Monetary Policy Wars Will Outweigh Political Influence for USD/MXN

Monetary Policy Wars Will Outweigh Political Influence for USD/MXN

John Kicklighter, Chief Strategist

Talking Points:

  • Many traders and analysts have equated the USD/MXN exchange rate as a gauge of standings in the US Presidential race
  • Economic and trade policies for the US are indeed critical for Mexico, but the FX signal is not clear
  • A conflicting fundamental theme will be in play Thursday when the Bank of Mexico is expected to hike rates 50bps

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

With the rise of political coverage by mainstream and financial news outlets, it shouldn't surprise that an exchange rate like USD/MXN is being interpreted for its role in this dynamic given its position in policy platforms. However, this signal is not a constant and altogether accurate drive for the pair. And, in the upcoming session it will certainly be focusing on another critical theme that has pulled back from the lime light as of late: competitive monetary policy (what some others would term 'currency wars'). While USD/MXN may not be in many traders regular repertoire, it will generate serious volatility amid active fundamental trends.

In the upcoming North American session (18:00 GMT), the Bank of Mexico is scheduled to announce its decision on monetary policy. The forecast among economists is already calling for a 50 basis point rate hike to a 4.75 percent benchmark. There is good precedence to expect such a dramatic move. In 2016, the group offered up 50 bps hikes twice - on February 17 and June 30. Both of those times happen to have coincided with rallies in the USD/MXN exchange rate to record highs. BoM Governor Agustin Carstens has not been shy about his intentions to curb the extraordinary tumble in the Mexican Peso and paired the first effort to direct intervention on the exchange rate since 2009. USD/MXN is happens to be coming off a fresh record high once again.

Volatility is likely to result from this event one way or the other. If Governor Carstens doesn't announce intervention and/or a hefty rate hike, the Peso is likely to stumble (USD/MXN rally). Given the obvious corollary to be drawn to similar technical and circumstantial events in the recent past, expectations will be set high for monetary policy response which can warp the reaction to this meeting. Further, this event will likely be met with stronger countervailing winds that what was experienced before. The Federal Reserve's policy efforts afford an impossible potential headwind, while emerging market and risk connections are constant buffers. And, then there is also the influence from the US Presidential election when the next debate on October the 9th approaches. We focus on this technically and fundamentally active currency pair in today's Strategy Video.

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