USD/MXN: Mexican peso consolidates modest recovery after Banxico rate hike

• Mexican peso holds to modest gains after Banxico meeting. 
• The central bank rose rates by 25bp to 8.0%, one Board member asked for a 50bp hike. 

The USD/MXN pair bottomed at 20.18 after the decision of the Bank of Mexico hike the key rate by 25 basis points to 8.0%. The decision came as expected and had a limited impact on Mexican assets. 

Near the end of the American session, USD/MXN trades at 20.25/30, modestly lower for the day. It is about to post the second decline in-a-row but he bullish pressure still remains elevated. The decision to hike could offer some support to the peso in the short-term but reflects ongoing concerns about the exchange rate and uncertainties about the macroeconomic outlook.

Banxico keeps rates on hold, sends a message to AMLO

The Bank of Mexico decided to raise the target for the overnight interbank to 8.00% after today’s meeting. In the statement, the Governing Board mentioned that the Mexican peso depreciated significantly, for external factors and also affected by the announcement regarding the New Mexico City International Airport project and, “in general, by markets’ concerns regarding both the incoming administration’s policies and some legislative initiatives.” 

According to Banxico, the environment entails significant medium and long-term risks that could affect the country’s macroeconomic conditions. “It is particularly relevant that, in addition to following a prudent and robust monetary policy, measures to foster greater productivity and an environment of confidence and certainty for investors are adopted, public finances are consolidated sustainably, and both transparency and accountability of public policies are strengthened.” It is an advice to the next administration. Andres Manuel Lopez Obrador six-year mandate starts December 1. 

The Board sees significant inflation risks related to the possible adoption of policies that could structurally affect the economy’s price formation process, being the most relevant the exchange rate. They want a stable Mexican peso that lately has been falling significantly as investors lose confidence on AMLO’s policies.