- USD/MXN extended the decline to around 18.60 in the early Asian session on Friday.
- Expectations of a Fed interest rate cut in September are supporting the Mexican peso.
- The Mexican peso remains strong despite a surprise interest rate cut by Banxico last week.
USD/MXN is trading lower for the fourth consecutive day at around 18.60 during early European trading hours on Friday. The pair’s further downside is supported by expectations that the US Federal Reserve (Fed) will cut interest rates by at least 25 basis points in September. Investors will keep an eye on the preliminary US Michigan consumer sentiment index for August, as well as building permits and housing starts, due later on Friday. In addition, Austan Goolsbee of the Fed is scheduled to speak.
Upbeat U.S. economic data on Thursday, including initial jobless claims and retail sales, eased fears of a potential recession in the United States. However, traders still expect the Fed to cut interest rates in September, weighing on the greenback in the short term. According to the CME FedWatch tool, the market is now fully priced in for a 25 basis point (bp) Fed rate cut in September, with nearly 20% expecting a 50 bp cut.
The Mexican peso’s upward trend came despite a surprise rate cut by the Mexican Central Bank (Banxico) last week, which cut the benchmark rate by 25 basis points from 11% to 10.75%. Mexican economist Alexis Milo, former chief economist at HSBC México, noted: “The markets in the US are having their best day in over a year and this is allowing the peso to recover. This effect outweighed the devaluation we would have expected if a rate cut had been made.”
Frequently asked questions about Banxico discount codes
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to maintain the value of the Mexican currency, the Mexican peso (MXN), and to set monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or near its target of 3%, the midpoint of a tolerance range between 2% and 4%.
Banxico’s main tool for managing monetary policy is setting interest rates. When inflation is above target, the bank tries to contain it by raising interest rates, making it more expensive for households and businesses to borrow money and cooling the economy. Higher interest rates are generally positive for the Mexican peso (MXN) because they lead to higher returns and make the country more attractive to investors. On the contrary, lower interest rates weaken the MXN. The interest rate differential with the USD, or the way Banxico will set interest rates compared to the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year and its monetary policy is heavily influenced by the decisions of the U.S. Federal Reserve (Fed). As a result, the central bank’s policymaking committee usually meets a week after the Fed. In doing so, Banxico reacts to and sometimes anticipates monetary policy actions by the Federal Reserve. For example, after the Covid-19 pandemic, Banxico raised interest rates before the Fed raised them to reduce the likelihood of a significant devaluation of the Mexican peso (MXN) and prevent capital outflows that could destabilize the country.
