USD/MXN jumps above 19.60 to highest since early October

The USD/MXN rose from near 19.50 to 19.65, reaching the highest level in almost two months. Afterward it pulled back modestly and it is trading at 19.61, posting gains for the fourth day in a row. Technical factors, trade deals uncertainty and the Latin American situation, continue to support the upside in the pair. 

From a technical perspective, it continues to break important resistance levels adding support to the bullish run. At the moment is testing the 19.64 zone, a consolidation above would clear the way to more gains. 

Regarding fundamentals, Latin American currencies continue to underperform amid the ongoing social situation in many countries. The Chilean peso and the Brazilian real hit record lows versus the US dollar. 

Trade headlines limit the optimism about the Mexican peso. The US-Mexico-Canada trade deal has not yet passed the US Congress. Also, US-China trade tensions affect market sentiment, damaging the demand for high yielding currencies like MXN. 

Banxico minutes

At the last meeting, the Bank of Mexico lowered the key interest rate by 25 basis points. According to the minutes, “most members noted that in an environment of marked uncertainty, the balance of risks to growth continues biased to the downside.”

Regarding inflation, “some members pointed out as a possible indicator of lower inflationary pressures the fact that the producer price index was 0.6% in October as compared to the same month of the previous year, noting that this rate is the lowest observed since August 2015”. Overall, most members agreed that uncertainty still persists regarding the risks that could make inflation deviate from its foreseen trajectory. 

At the meeting, two members voted for a 50 basis points rate cut. One of them, Gerardo Esquivel, mentioned it is “worth remembering that Mexico is an atypical case since it is the only Latin American country that has inflation close to target and, simultaneously, maintains a tight monetary policy stance. For this reason, I believe that on this occasion it was possible and desirable to reduce the interest rate by 50 basis points, without jeopardizing or compromising Banco de México’s fundamental mandate. Under the current economic conditions, a 25-basis point reduction is not enough and comes in too late.”

In the same perspective,  Jonathan Ernest Heath, who also voted for a larger cut, argued there is a wide margin of maneuver, even if considering that the balance of risks for inflation, “despite being well-balanced in the short term, is uncertain in a longer time horizon.”