USD/MXN retreats modestly after Banxico extraordinary measures, remains near 24.50

• Bank of Mexico cut rates and announces additional measures.
• Mexican peso holds on to losses across the board, affected by risk aversion.

The USD/MXN pair peaked on Tuesday at 24.53, the highest level since April 8 following unexpected announcements by the Bank of Mexico. The pair quickly pulled back under 24.50, to the range it has been trading over the last hours between 24.49 and 24.25, consolidating a 1.3% daily gain.

The deterioration in market sentiment weakened the demand for emerging market currencies. Main indexes in the US finished with losses of more than 2%. Crude oil remained under pressure, with the WTI barrel falling from $21.00 to $13.00. The risk aversion environment weighed on the Mexican peso and also on other emerging market currencies.

Banxico cut rates and announces additional measures

In an extraordinary meeting, the Governing Board of the Bank of Mexico decided to lower the key interest rate by 50 basis points to 6%.

Banxico also announced additional measures “to foster an orderly functioning of financial markets, strengthen the credit channels and provide liquidity for the sound development of the financial system”, including: increasing liquidity during trading hours to facilitate the optimal functioning of financial markets and payment systems; extending the counterparts eligible for the Ordinary Additional Liquidity Facility; provision of resources to banking institutions to channel credit to micro, small-, and medium-size enterprises and individuals affected by the COVID-19 pandemic; collateralized financing facility for commercial banks with corporate loans, to finance micro, small- and medium-size enterprises; and swaps of government securities and foreign exchange hedges settled by differences in US dollars with counterparts not domiciled in the country, to be traded during hours when Mexican markets are closed.

The most important regarding FX trading is the last one. Banxico “will incorporate into its foreign exchange intervention tools, the possibility to conduct hedge transactions settled by differences in US dollars. This will be done in order to operate during the hours when Mexican markets are closed. These transactions will therefore be conducted at any moment through entities domiciled outside of Mexico. The goal of this complementary tool will be to provide orderly operating conditions in the MXN/USD exchange market, particularly during Asia and Europe trading hours, as per determined by the Foreign Exchange Commission.”