USD/MXN hits ten-day highs near 25.00, consolidates strong weekly gains

• Mexican peso among the worst performers of the week. 
• USD/MXN heads for highest weekly close on record near 25.00.

The USD/MXN reached during Friday’s American session at 24.89, the highest level in a week. It was about to end the session trading around 24.75, up 6.4% from a week ago. 

The greenback rose across the board over the last days, but the rally in USD/MXN also received support from a weak Mexican peso. The currency was among the worst performer. Global risk aversion, expectations about a sharp recession in Mexico, potentail downgrades in its credit rating, a deterioration in Pemex and fears about the impact of the coronavirus on the health care system, are some of the negative factors that weigh at the moment on MXN. 

Mexico: dilemmas at the central bank 

Mexico’s central bank next meeting is in May. Considering what is going on around the global and domestic economy, a Board meeting before seems very likely at the moment. Many analysts expect more rate cuts considering the shape of the Mexican economy as it shutdowns to fight the coronavirus. The decline of the Mexican peso could could boost inflation but the emergency of the economy seems like a bigger problem. 

So far Banxico has no made no intervention in the currency market, other that auctions and the implementation of the swap line with the Federal Reserve. In the minutes of the last meeting, one member of the board voted for a cut of 25bps inestead of the 50bps cut voted for the majority.     

“Despite its hawkish rhetoric, we continue to expect Banxico to ease its inexplicable currently restrictive monetary policy stance. In our view, Banxico should cut rates rapidly, considering the lagged effects of monetary policy and its forward-looking nature. With the economy entering a deep recession, even if we account for uncertainty, downward pressures on core prices will eventually more than outweigh upward pressures”, explained BBVA analysts. They expect Banxico to lower the policy rate 75bp in April in an out-of-schedule meeting. 

According to one Banxico board member “now is the time to consider asset purchase programs like those adopted by other central banks.  He/she mentioned that the latter makes sense given that part of the instability is due to the fall in oil prices originated by the combination of supply and demand shocks, where at least one of them is transitory”, the minutes mentioned.