The USD/MXN exchange rate has erased most of its Monday’s gains as traders focus on the upcoming Banxico interest rate decision. The pair, which soared to 20.24 on Monday amid the unwinding of the Japanese yen carry trade, has retreated to 19.30.
Banxico central bank decision
The USD/MXN pair wil be in the spotlight as the Mexican central bank delivers its August decision. This decision will come after the bank started cuttng rates in its March meeting when it slashed rates by 25 basis points to 11%.
Since then, the bank has left rates unchanged at 11% in the last three consecutive meetings as it observed the recent inflation trends.
Recent economic data shows that Mexico’s inflation has started to creep up back again after falling to 4.4% in March. Data by the statistics agency revealed that the headline CPI rose to 4.98% in June, the highest reading since June last year.
Therefore, the most likely scenario is where the bank leaves interest rates unchanged at 11% since cutting them would spur more inflation. At the same time, hiking interest rates would interfere with the economic recovery.
Recent economic data have shown that the country’s economy was slowing. According to the statistics agency, growth eased to 0.2% in Q2 after growing by 0.3% in the previous quarter. This slowdown was because of the services sector. As a result, analysts at Creditcorp downgraded this year’s growth rate to 1.9% from 2.2%.
The Banxico has also lowered its estimate of the country’s economy this year. A likely reason why growth will slow is that the US economy, its biggest trading partner is showing signs of weakness,
A survey of economists by Reuters was mixed, with 12 of them predicting a hold on rates and the other 10 predicting a 25 basis point cut.
The Mexican peso is also eying developments in Japan, where the central bank surprised the market with a rate cut. Just on Monday, the currency crashed to its lowest point since 2022 as investors unwound the carry trade.
For a long time, Japanese investors have moved to stable high-yield countries like Mexico to take advantage of high interest rates. Therefore, with the era of cheap Japanese yen ending, many of these investors have started to unwind their positions.
At the same time, traders are worried about Mexico’s politics as a new parliament is set to be sworn in in September. In a note, an analyst from ING said:
“I worry about Mexican politics coming back into play when the new parliament sits in September — and that might prevent the peso from straying too far below 19.00 now.”
While the Mexican peso has calmed down, analysts caution that the unwinding of the carry trade is not over yet and could still hurt the market.
US economic events and the Fed
The other big catalyst for the USD/MXN pair is the developments in the United States where the recent economic numbers have pointed to a slowing economy.
In a report last week, the Bureau of Labor Statistics (BLS) noted that the economy added just 117k jobs in July, the smallest increase since 2022.
That report also showed that the unemployment rate rose to 4.3%, much higher than last year’s low of 3.5%. The average hourly earnings also dropped during the month.
Before that, a separate report by ADP showed that the private sector created 114k jobs in August.
Meanwhile, inflation numbers have continued falling in the past few months, with the headline consumer price index (CPI) fell to 3.0% in June while the core CPI dropped to 3.2%.
Therefore, most analysts believe that the Federal Reserve will start cutting interest rates in the coming month. Some analysts such as those from Citi, Wells Fargo, and JPMorgn anticipate the bank cutting by 0.50%.
Jefferies analysts, on the other hand, expect the bank to come out strongly this month and intervene if the conditions worse.
Federal Reserve interest rate cuts would likely make the Mexican peso more attractive to investors since the currency has a higher yield.
USD/MXN technical analysis
USD/MXN chart by TradingView
The daily chart reveals that the USD to MXN exchange rate has been in a strong bull run in the past few months after bottoming at 16.26 in April. It has now moved to the fifth phase of the Elliot wave chart pattern.
The pair also formed a golden cross chart pattern as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other.
Most recently, the pair has formed an inverse hammer pattern, a popular reversal sign. Therefore, the pair will likely continue falling as sellers target the upper side of the third phase of the Elliot Wave pattern at 19. It will then resume the bullish trend as bulls attempt to retest the highest point this year.
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