MEXICAN LAUNDRY KEY POINTS:
- US core inflation has softened, triggering a negative movement USD / MXN
- The market is now turning its attention to Banxico’s interest rate decision on Thursday
- If the central bank tightens monetary policy and signals higher interest rate rises, the Mexican peso is likely to win US dollar in the near future
The Mexican peso on Wednesday removed a major hurdle that led to further appreciation after US inflation data failed to trigger treasury yields. The Bureau of Labor Statistics published today consumer price data for the previous month. According to the report, the main consumer price index remained unchanged at 5.4% year-on-year, while the main index fell by two tenths of a percentage point to 4.3%, in line with consensus expectations.
Moderate inflation (compared to previous months), especially in the food and energy exclusion category, could provide the Fed with more shade to be patient before removing policies, waiting for “significant economic progress”. All this means is that a quantitative mitigating restrictive notification may not come in the next few months, but at the end of the year, perhaps in December, a scenario that would slow the recovery of long-term interest rates and support EM FX.
Moving on to domestic MXN catalysts, Banxico’s interest rate decision will be central on Thursday. The central bank raises the overnight interest rate by 25 basis points to 4.50%, having risen at the same level. June meeting. As the move comes at full cost, traders will focus mainly on further guidance to determine whether the institution will continue to tighten monetary policy in the coming months to contain growing inflationary pressures.
Although Mexican inflation slowed slightly in July during shrinkage base effects, the underlying dynamics have not changed significantly, making policy-makers very uncomfortable. Let’s remind you, Banxico wishes to achieve 3% inflation in the long run, plus or minus one percentage point, but the main consumer price index in July was 5.81% year-on-year, well above the tolerance zone.
As consumer price indices become higher and uncertainty about the overall inflation outlook due to growing pressure on key components, the Bank can subtly suggest that the recent adjustments are part a effort cycle. The hawk message leads traders price more for interest rate hikes in, a fact that would support the Mexican peso and weigh USD/ MXN exchange rate at least until the Federal Reserve Jackson Hole Symposium (At this point, the story may change again).
USD / MXN TECHNICAL ANALYSIS
The USD / MXN has fallen lower after a collision of 200 moving averages and now appears to be heading for key support near 19.80. If sellers manage to push prices down from that floor, the downward pressure could intensify, triggering a move to a 2021 low of around 19.60.
Alternatively, if the USD / MXN is able to turn higher after Wednesday’s decline, tthe first resistance to be considered occurs in area 20.20 / 20.25. When this technical barrier was removed, we saw a jump in the highest half of June at 20.75.
USD / MXN TECHNICAL TABLE
EDUCATIONAL INSTRUMENTS FOR TRADE
– Written by DailyFX market strategist Diego Colman