- Mexico’s persistently high inflation could lead Banxico to an aggressive tightening cycle in the second half of the year
- Markets expect two more 25 bps in 2021, although investors will pay the price in the third
- Banxico’s tighter monetary policy may be against the Mexican peso US dollar
Previously today that I wrote about inflation in Mexico following the publication of the latest INEGI data. The general consumer price index in June fell from 5.89% in May to 5.88% a year earlier and remained well above the central bank’s target ceiling (as a reminder, Banxico aims to achieve an inflation rate of 3% +/- 1 percentage point above or below this level). At the same time, core inflation is an indicator that is closely monitored by policyManufacturers, excluding volatile products such as fuel and agricultural products, jumped 4.58% year-on-year, the highest level since December 2017.
Looking at the data, there is no doubt that the overall outcome of the CPI is worrying, but the relentless rise in core inflation is more worrying, as that indicates enlargement price pressure in the middle of the climbing costs of services. As the economy opens up more fully again in the coming months, intermittent demand is expected to exacerbate the observed trend, ensuring that higher inflation spreads until the end of the year and possibly beyond.
To ensure that inflation approaches the target across the policy perspective and expectations does not change without anants using second-round effects, Banxico there is nothing left but to raise borrowing costs again in the second half of 2021. The market is currently estimating two more 25 basis point interest rate hikes until the end of the year, although expectations for the third hike have begun to change. If all three hikes take place, Banxico is the benchmark will by the end of the year 5.00%.
Tighter monetary policy from Banxico would raise named rates in the country and shouldto Increase the Mexican Peso |, as long as US Treasury yields remain relatively low. But like I argued in a previous article, for yield-seeking trade To work in favor of MXN, there should be volatility not restrained (many refer to traders choose to look at the VIX index to see how volatility is behavior in the broad market). On the contrary, iAs investor sentiment deteriorates, markets become defensive and turbulence emerges, there is nothing to prevent the Mexican peso from weakening against the dollar. Usually when risk averse lights up, reduce traders EM FX exposure rush toward hidden assets.
USD / MXN TECHNICAL ANALYSIS
From a technical point of view, after a short jump upwards, USD / MXN appears to have stalled again after a 20-day moving average 20.00 / 20.20. From then on, as sales pressure begins to intensify, the first support will appear for 19.80, followed by a low in 2021 near the 19.55 region. Beyond this floor comes the psychological level of the game at 19.00.
Alternatively when the bulls regain control and USD/ MXN succeeds 20.00 / 20.20 resistance decisively, buyers can drive the exchange rate towards the level of 20.75, where the highest price in June approaches the 12-month declining trend line.
USD / MXN TECHNICAL CARD
TRADERS ‘EDUCATIONAL TOOLS
—Written by DailyFX market strategist Diego Colman
Follow me on Twitter: @DColmanFX