As the USD/MXN pair continues its downward trend, trading around 18.60 in early European hours on Friday, investors are looking towards a potential Fed rate cut in September. The optimism surrounding a 25 basis point cut by the US Federal Reserve is supporting the strength of the Mexican Peso. Key economic indicators, such as the US Michigan Consumer Sentiment Index, Building Permits, and Housing Starts, are on the radar for investors today, along with a speech from Fed’s Austan Goolsbee.
Despite positive US economic data on Thursday, including Initial Jobless Claims and Retail Sales, concerns about a looming recession persist. The market is pricing in a 25 bps Fed rate cut in September, with a 20% chance of a more aggressive 50 bps cut, according to the CME FedWatch tool. This anticipation is weighing on the US Dollar in the short term.
Interestingly, the Mexican Peso has remained resilient even after a surprise rate cut by Banxico last week, which lowered interest rates from 11% to 10.75%. The peso’s strength can be attributed to the positive performance of US markets and the overall optimism in the air. Mexican economist Alexis Milo highlighted the impact of the US market’s performance on the peso’s recovery, overshadowing the expected depreciation post-rate cut.
Banxico FAQs
What is Banxico?
The Bank of Mexico, also known as Banxico, is Mexico’s central bank responsible for maintaining the value of the Mexican Peso and setting monetary policy. Its primary goal is to keep inflation low and stable within target levels, typically around 3%.
How does Banxico influence the Mexican Peso?
Banxico uses interest rates as its main tool to guide monetary policy. Higher interest rates can strengthen the Mexican Peso by attracting investors seeking higher yields. On the other hand, lower interest rates may weaken the peso. The rate differential between Banxico’s and the Fed’s interest rates plays a crucial role in determining the peso’s strength.
How does Banxico’s policy relate to the US Federal Reserve?
As Banxico meets eight times a year, its decisions are often influenced by the US Federal Reserve. The central bank usually reacts to or anticipates Fed policy changes to maintain stability in the Mexican economy. This coordination helps prevent drastic currency depreciation and capital outflows that could harm the country.