USD/MXN trades sideways after rate cut, remains above 19.50

The USD/MXN pair rose late during Friday’s American session, climbing back above 19.60. It is about to end the week with a small gain. The pair remain  |  16/08/2019 19:46
  • Mexican peso holds steady after Banxico rate cut. 
  • USD/MXN about to end week modestly higher, unable to break key resistance at 19.75/80. 

The USD/MXN pair rose late during Friday’s American session, climbing back above 19.60. It is about to end the week with a small gain. The pair remains supported by global risk aversion that affects EM currencies. 

The greenback lost strength amid lower US yields and Fed rate cut expectations. Still, the impact of risk aversion usually prevails. Despite the volatility, USD/MXN traded within the 19.30-19.75 range over the week. A consolidation on top of 19.75/80  should point to a test of 20.00 while on the downside, under 19.30 the Mexican Peso will likely strengthen.

Banxico cuts, MXN holds 

Yesterday the Bank of Mexico cut its key interest rate by 25bp, the first cut since 2014. The Mexican peso held steady. Market consensus expected no change, however, the decision was not a surprise. Also, currently at 8%, the rate is still elevated compared to other Emerging markets. 

Analysts at TD Securities explained the expected decision was almost equally split between a hold and a cut of sorts (most expecting -25bps vs two forecasters on Bloomberg calling for -50bps). “The decision is not entirely surprising as Banxico's policy stance has been leaning in a dovish direction for a while, in the face of non-convergent inflation expectations. It was just a matter of time. We thought, however, the risk of unsettling the market by easing rates at a time that EM currencies and the peso were under pressure would prevail as a rationale to hold. Banxico has shown less concerns on this front and may potentially follow with another cut at the next September meeting.”

They add that the market is currently priced for about 33bps of easing on 26 Sept, and a total of -74bps by year-end. So it seems clear that Banxico has started an easing cycle. How fast and how deep is highly dependent on how the Mexican peso performs. 

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