USD/MXN drops toward 19.10 as the Mexican peso rebounds

The USD/MXN pulled back on Wednesday, the day before the Bank of Mexico meeting. The pair yesterday hit the highest level in two weeks at 19.25 and today dropped below 19.15. 

The Mexican peso benefited from technical factors and also amid an improvement in risk sentiment. Markets rose supported by comments from US Treasury Secretary Mnuchin that fueled optimism about a deal between the US and China. Crude oil prices extended it rally and approached $60.00 a barrel (WTI). Since June 18, it gained 14%. 

Levels to watch 

Near the end of the day, USD/MXN trades at 19.13, near the 19.10 support. Ahead of the Asian session, short-term technical are biased to the downside. A break under 19.10 is needed to keep the bearish momentum in place. Below the next support stands at 18.99/19.00 and then comes the critical 18.90. 

On the upside, the 19.25-19.30 area has become the key resistance band. It was the swing point yesterday and also today. A consolidation on top would signal more gains ahead with not much resistance until 19.45. 

Will Banxico follow the Fed? 

On Thursday, the Bank of Mexico will have its Board meeting. The policy rate is expected to remain at 8.25%. The focus will be on the statement. The current bias of the central bank is hawkish but one member of the board has dissented in the last two meetings, asking for a more neutral tone. Considering the shift regarding US monetarily policy, Banxico could follow. It could deliver a more neutral or even a dovish statement. Analysts expect rate cuts from Banxico but not in the near term. 

“We still expect to see the start of the easing cycle in the second half of the year, but now we think it will start in September rather than in August. By then, the situation will be of falling inflation, a growing output gap, weak labor markets, a stable MXN and, most likely, the Fed on an easing mode, already starting to cut rates. Reality will catch up with Banxico. In our view, Banxico risks making a sharp U turn it its communication in the next few months unless they start to acknowledge the improved backdrop for inflation and start to ease the tone and show more flexibility”, said BBVA analysts. According to them, Banxico should start cutting rates now, “considering that monetary policy should be forward-looking.”