Mexican Peso rises on hot inflation data, Banxico turns vigilant


content provided with permission by FXStreet


  • Mexican
    Peso
    strengthens
    for
    seventh
    session
    with
    USD/MXN
    down
    0.44%,
    sparked
    by
    high
    inflation.

  • Banxico
    Deputy
    Governor
    Borja
    adopts
    neutral
    stance,
    despite
    emphasizing
    that
    policy
    is
    restrictive.

  • Banxico’s
    minutes
    to
    address
    disinflation
    forces,
    growth
    disappointments,
    and
    potential
    downside
    risks
    in
    upcoming
    meeting.

The
Mexican
Peso
extended
its
rally
for
the
seventh
consecutive
session
on
Wednesday
after
inflation
got
close
to
5%,
which
might
deter
the
Bank
of
Mexico
(Banxico)
from
easing
policy
at
the
upcoming
monetary
policy
meeting
in
August.
Therefore,
the
USD/MXN
continued
to
edge
lower
and
traded
at
17.83,
a
loss
of
0.44%.

Mexico’s
inflation,
as
measured
by
the
Consumer
Price
Index
(CPI),
was
higher
than
expected
in
June,
hitting
4.98%,
above
estimates
of
4.84%.
This
triggered
a
reaction
amongst
Banxico’s
policymakers
with
Deputy
Governor
Jonathan
Heath
writing
on
X
that
June’s
inflation
data
was
“very
worrying.”

Recently,
Deputy
Governor
Galia
Borja
said,
“It’s
prudent
not
to
make
hasty
decisions”
regarding
monetary
policy.
She’s
adopted
a
more
neutral
stance,
adding
that
officials
must
be
patient,
though
she
added
that
the
current
policy
is
“undoubtedly
restrictive.”

On
Thursday,
Banxico
will
reveal
its
latest
monetary
policy
minutes.
Analysts
at
JP
Morgan
wrote,
“We
expect
the
minutes
to
elaborate
on
both
disinflation
forces
and
some
of
the
upside
risks
embedded
in
the
ongoing
MXN
re-adjustment,
and
the
forces
behind
growth
disappointments.”

They
added
that
Banxico’s
board
is
expected
to
acknowledge
the
“underwhelming
growth
dynamics
and
downgraded
its
growth
outlook—now
openly
underscoring
downside
risks
to
economic
activity.”

Across
the
border,

Federal
Reserve

(Fed)
Chair
Jerome
Powell
appeared
at
the
US
House
of
Representatives
and
repeated
some
of
Tuesday’s
words
that
the
disinflation
process
is
evolving
and
that
the
risks
of
achieving
the
dual
mandate
have
become
more
balanced.
He
added
that
Fed
officials
needed
good
inflation
data
to
lower
borrowing
costs
and
that
neutral
rates
must
have
moved
up
“at
least
in
the
short
term.”

Daily
digest
market
movers:
Mexican
Peso
rockets
due
to
high
inflation

  • According
    to
    the
    National
    Statistics
    Agency
    (INEGI),
    Mexico’s
    June
    inflation
    figures
    were
    higher
    than
    expected
    due
    to
    a
    rise
    in
    food
    prices
    when
    most
    economists
    expect
    Banxico
    to
    resume
    lowering
    interest
    rates.
  • Mexico’s
    CPI
    rose
    from
    4.69%
    YoY
    to
    4.98%
    in
    June,
    while
    core
    CPI
    dipped
    from
    4.21%
    to
    4.13%
    annually,
    exceeding
    the
    estimated
    4.15%.
  • Despite
    the
    rise
    in
    inflation,
    Capital
    Economics
    analysts
    estimate
    that
    the
    Mexican
    central
    bank
    could
    cut
    rates
    at
    the
    August
    meeting.
  • On
    Monday,
    the
    New
    York
    Federal
    Reserve
    revealed
    that
    consumer
    inflation
    expectations
    were
    lowered
    from
    3.2%
    to
    3%
    for
    one
    year.
  • US
    CPI
    is
    foreseen
    dropping
    from
    3.3%
    to
    3.1%
    in
    the
    12
    months
    to
    June,
    while
    underlying
    inflation
    is
    projected
    to
    stay
    firm
    at
    3.4%
    YoY.
  • US
    Dollar
    Index
    (DXY),
    which
    tracks
    the
    value
    of
    a
    basket
    of
    six
    currencies
    against
    the
    US
    Dollar,
    advances
    some
    0.16%
    and
    is
    up
    at
    105.17.
  • According
    to
    the
    CME
    FedWatch
    Tool
    data,
    the
    odds
    for
    a
    September
    cut
    are
    72%,
    up
    from
    70%
    on
    Tuesday.

Technical
analysis:
Mexican
Peso
appreciates
sharply
as
USD/MXN
falls
below
17.85

The
USD/MXN
continued
to
extend
its
losses
past
June
24,
the
latest
cycle
low
of
17.87,
which
could
pave
the
way
for
a
deeper
correction.
Momentum
has
abruptly
shifted
in
bears’
favor,
an
indication
that
sellers
will
drive
the
exotic
pair
price
action
lower.

If
the
downtrend
continued,
the
next
support
would
be
the
confluence
of
the
December
5
high
and
the
50-day
Simple
Moving
Average
(SMA)
at
around
17.56/57,
followed
by
the
200-day
SMA
at
17.26.
The
next
floor
level
would
be
the
100-day
SMA
at
17.19.

For
a
bullish
resumption,
USD/MXN
must
surpass
18.10,
followed
by
a
rally
above
the
June
28
high
of
18.59,
allowing
buyers
to
challenge
the
YTD
high
of
18.99.
Conversely,
sellers
will
need
to
push
the
pair
below
18.00,
which
could
extend
the
decline
toward
the
December
5
high-turned-support
at
17.56,
followed
by
the
50-day
SMA
at
17.37.


Banxico
FAQs

The
Bank
of
Mexico,
also
known
as
Banxico,
is
the
country’s
central
bank.
Its
mission
is
to
preserve
the
value
of
Mexico’s
currency,
the
Mexican
Peso
(MXN),
and
to
set
the
monetary
policy.
To
this
end,
its
main
objective
is
to
maintain
low
and
stable
inflation
within
target
levels

at
or
close
to
its
target
of
3%,
the
midpoint
in
a
tolerance
band
of
between
2%
and
4%.

The
main
tool
of
the
Banxico
to
guide
monetary
policy
is
by
setting
interest
rates.
When
inflation
is
above
target,
the
bank
will
attempt
to
tame
it
by
raising
rates,
making
it
more
expensive
for
households
and
businesses
to
borrow
money
and
thus
cooling
the
economy.
Higher
interest
rates
are
generally
positive
for
the
Mexican
Peso
(MXN)
as
they
lead
to
higher
yields,
making
the
country
a
more
attractive
place
for
investors.
On
the
contrary,
lower
interest
rates
tend
to
weaken
MXN.
The
rate
differential
with
the
USD,
or
how
the
Banxico
is
expected
to
set
interest
rates
compared
with
the
US
Federal
Reserve
(Fed),
is
a
key
factor.

Banxico
meets
eight
times
a
year,
and
its
monetary
policy
is
greatly
influenced
by
decisions
of
the
US
Federal
Reserve
(Fed).
Therefore,
the
central
bank’s
decision-making
committee
usually
gathers
a
week
after
the
Fed.
In
doing
so,
Banxico
reacts
and
sometimes
anticipates
monetary
policy
measures
set
by
the
Federal
Reserve.
For
example,
after
the
Covid-19
pandemic,
before
the
Fed
raised
rates,
Banxico
did
it
first
in
an
attempt
to
diminish
the
chances
of
a
substantial
depreciation
of
the
Mexican
Peso
(MXN)
and
to
prevent
capital
outflows
that
could
destabilize
the
country.