Mexican Peso Rises After Inflation Data Release:
On Tuesday, the Mexican Peso (MXN) gained against major currency pairs following the release of Mexico's September inflation data. According to the National Institute of Statistics and Geography (INEGI), the inflation rate for the first half of September was 0.09%, higher than the 0.03% decline in August but below economists' expectations of 0.15%.
The core inflation rate rose by 0.21% in the first half of September, higher than the 0.10% of the previous month but below the expected 0.23%.
These data were released two days before the conclusion of the September policy meeting of the Bank of Mexico (Banxico) on Thursday. The lower-than-expected inflation rate may increase the chances of an interest rate cut by the Bank of Mexico.
Mexican Peso Edges Higher Ahead of Banxico Meeting:
In recent days, the Mexican Peso has softened slightly against the US Dollar (USD) and the British Pound (GBP) while showing mixed performance against the Euro (EUR) due to growth concerns in the Eurozone, which weakened the single currency on Monday.
Banxico's current official rate is 10.75%, but it is expected to change after Thursday's meeting. According to a recent Bloomberg survey, 20 out of 25 economists and bank analysts believe Banxico will cut rates by 25 basis points (bps). Four analysts expect a 50 basis point cut, and only one believes the central bank will maintain the rates unchanged. Expectations of a rate cut are typically adverse for a currency as it reduces foreign capital inflow.
“We expect Banxico to lower the policy rate by 25 basis points from 10.75% to 10.50% at the September 26 meeting,” said Christian Lawrence, Senior Cross-Asset Strategist at Rabobank, in a recent report. “The CPI inflation data released since the last meeting show overall inflation progress following food price increases (4.99% in August), with core inflation now down to the upper limit of the central bank's 3% target tolerance band of ±1pp.” he added.
Although some analysts speculate that Banxico might refrain from cutting rates to support the weaker Peso, Rabobank doesn't agree.
“The recent weakening of the Peso might raise some concerns for the central bank, particularly the potential impact of inflation pass-through. However, these fluctuations remain within recent ranges, and many can be attributed to unwinding of carry trades. Nonetheless, the expectation of rising sovereign risk premiums might further support the Peso’s structural weakness, and we believe that inflation risks from the currency have now shifted upward,” said Lawrence.
At the August meeting, Banxico decided to cut rates by 25 basis points, lowering the official rate from 11.00% to 10.75%. However, this decision was contentious, with only three members supporting the cut while two members wanted to keep the rates unchanged.
“Since that meeting, inflation readings have further declined,” said Dr. Win Thin, Head of Global Market Strategy at Brown Brothers Harriman (BBH). “The next Banxico meeting is scheduled for September 26, and if the disinflation trend continues, another 25 basis point cut to 10.50% is expected. The swap market anticipates 175 basis points of easing over the next 12 months.”
Inflation Data Spurs Peso Rise:
The data shows a slight cooling of Mexico's Consumer Price Index (CPI), indicating that the central bank's monetary tightening policies are starting to take effect. The slowdown in inflation provides the Bank of Mexico (Banco de México) with the room to reconsider its rate stance, alleviating investors' concerns over prolonged aggressive rate hikes.
Investor Confidence in Mexico Strengthens:
As inflation shows signs of stabilization, investor confidence in Mexico's economy has strengthened. This positive sentiment has driven demand for the Peso, aiding its rise. Additionally, Mexico's robust export market, buoyed by trade ties with the United States, continues to support the Peso’s performance.
Peso Outlook:
Despite the Peso's strength, economic challenges remain, and its long-term trajectory will depend on domestic policies and external factors such as global market conditions and decisions by the U.S. Federal Reserve. For now, the Mexican Peso benefits from favorable inflation data and investor optimism.
