USD/MXN drops to 19.30 after Banxico meeting

• A cautious Banxico, keeps rates unchanged as expected. 
• Mexican peso rises modestly, USD/MXN holds near weekly highs. 

The USD/MXN printed a fresh daily low at 19.30 following the release of the statement from the Bank of Mexico (Banxico) with its decision. The Mexican peso rose modestly as the central bank showed a cautions tone instead of a dovish shift. The recent rally of the US dollar (up 3% over the last week) could have been a critical argument for the tone of the statement. 

Earlier today, the pair climbed to 19.44, the highest level since March 12, before pulling back. Risk aversion amid fears of a global slowdown triggered last Friday, a rally of the greenback against Emerging market currencies. 

The negative tone around EM assets still prevails but today after the beginning of the US session the pressure eased, favoring the correction in USD/MXN. After Banxico’s meeting the pair bottomed but still held above the 19.30 area that has become a relevant short-term support. 

The Bank of Mexico as expected kept the key overnight rate unchanged at 8.25% on a unanimous decision. 

Key Quotes from the statement: 

“Since the last monetary policy decision, the more favorable conditions that have prevailed in international financial markets have contributed to the positive performance of financial assets in Mexico. Nevertheless, some risk factors and the uncertainty associated with the Mexican economy have led to
an additional discount or risk premium for domestic assets. Among such factors, those related to the credit rating of Pemex, and even to Mexico’s sovereign debt, are particularly noteworthy.”

“The current environment continues to pose significant risks in the medium and long terms that could affect the country’s macroeconomic conditions, its potential growth, and the economy’s price formation process. In this regard, it is particularly important that, in addition to following a prudent and firm monetary policy, measures to foster an environment of confidence and certainty for investment and higher productivity are adopted, and public finances are consolidated sustainably. In this context, it is especially relevant that the fiscal goals set in the Economic Package for 2019 are attained. Strengthening the rule of law and tackling corruption are equally imperative.”

“As for inflation risks, the possibility that the peso exchange rate comes under pressure stemming from external or domestic factors stands out. Should the economy require adjustments either to the real exchange rate or to medium- and long-term interest rates, Banco de México will contribute to making such adjustments occur in an orderly manner, in an effort to prevent second-round effects on the economy’s price formation process.”

“ As for downside risks, those that stand out are possible lower price increases in some of the goods included in the non-core subindex or a greater-than-foreseen widening in slackness conditions. Altogether, although there has been an intensification of some of the downside risk factors, there are still others that might put upward pressure on inflation in greater magnitude and make it deviate from its foreseen path. For this reason, the balance of risks for the forecasted trajectory for inflation still remains to the upside, in an environment of high uncertainty.”

“Considering that the recent developments in inflation and its main determinants have not changed significantly with respect to their foreseen path, that the cyclical position of the economy has loosened somewhat, and that the current monetary policy stance is consistent with the convergence of inflation to its target, Banco de México’s Governing Board has decided unanimously to leave the target for the overnight interbank interest rate unchanged at 8.25%. Considering the risks to consolidate low and stable inflation as well as those the economy’s price formation is subject to, the Governing Board will take the necessary actions so that the reference rate is kept at a level consistent with the convergence of headline inflation to Banco de México’s target within the time frame in which monetary policy operates.”

“Banco de México’s Governing Board will maintain a prudent monetary policy stance and, under the current environment of uncertainty, will follow closely the potential pass-through of exchange rate fluctuations to prices, Mexico’s monetary policy stance relative to that of the U.S.-in an external environment that it is still subject to risks- and the behavior of slack conditions in the Mexican economy. In the presence and possible persistence of factors that, by their nature, involve risks to both inflation and inflation expectations, monetary policy will be adjusted in a timely and firm manner to achieve the convergence of inflation to its 3% target and to strengthen the anchoring of medium- and long-term inflation expectations so that they attain such target.”