USD/MXN: Peso consolidates near 1-month lows despite Banxico rate hike

The USD/MXN pair is rising modestly on Friday and is about to post the highest weekly close since late October. It opened the week under 19.00 and peaked at 19.22. After the decision of the Bank of Mexico dropped momentarily to 19.00 and a few hours later was back above 19.10. As of writing, it was trading at 19.12. Today the new governor of the Mexican central bank, Alejandro Díaz de León, warned that the proposed tax reform could hurt the peso.

From a technical perspective, the short-term bias points to the upside.  USD/MXN is near the key 19.30 resistance area that capped the upside in October and November. A consolidation on top would clear the way to more gains. On the flip side, the immediate support is seen around 19.00: a slide below would ease upside pressures with a potential target at 18.85. 

Banxico raises rates 

The Bank of Mexico rose the key rate by 25 basis point to 7.25% after a rebound in inflation. It was the first meeting presided by Díaz de Leon. The CPI index rose to 6.63% in November, near the 16-year high it reached in August. Also the rate hike from the Federal Reserve was another factor that contributed to the decision in Mexico. 

The rise follows three meetings with no change in the key rate. Now, since the cycle started in 2015 the rate has risen 425 points. Banxico signaled that it would do all its necessary to keep inflation under control. 

Economic outlook 

“Growth in the Mexican economy remains lackluster, as hesitation still looms amid political uncertainties. Real GDP growth was up 1.5 percent year over year in Q3, but shrank 0.3 percent over the quarter. The recent slowdown in GDP has, in part, been attributed to the temporary effects of the recent earthquake and hurricanes on the oil and tourism industries”, said analysts from Wells Fargo. 

Inflation continues to be a problem and a depreciation of the peso could increase inflation expectations, leading to more rate hikes that could ultimately affect the economy. 

According to Wells Fargo analysts the Mexican peso will likely be under pressure as the current economic and political climate encompasses NAFTA re-negotiations and upcoming presidential elections. “Although uncertainties persist, we expect that modest growth coupled with tight monetary policy, should decrease inflation while eventually reversing weakness in the peso. We expect growth in the Mexican economy of 2.0 percent in 2017, and 1.9 percent in 2018”.