USD/MXN remains under 19.70, near monthly lows

• USD/MXN steady around 19.60 despite risk aversion and after Banxico minutes. 
• Outlook still points to the downside but global concerns likely to limit EM currencies rally. 

The Mexican peso lost strength during the Asian session amid risk aversion amid increasing fears of a global slowdown but then managed to recover most of the losses against the US dollar, approaching monthly highs. 

The USD/MXN pair peaked at 19.70 on Asian hours and pulled back. During the US session bottomed at 19.54, slightly above the 19.52 level it reached yesterday, the weakest in two months. As of writing is hovering slightly below 19.60, looking at weekly lows. While it remains under 19.60, the bias is biased to the downside. The next strong support is seen at 19.40/45. On the flip side, immediate resistance is located at 19.70 and above at 19.80 (Dec 20 & 24 low) and 19.96. 

The Mexican peso held relatively well despite the slide in Wall Street, but risk aversion is likely to limit gains in commodity and emerging market currencies. Today the US dollar was not the primary driver in price action in EM.  “Emerging markets showed mixed performances, due among other things to the stabilization of oil prices. On the positive side, the Brazilian real continued to enjoy the positive mood after Bolsonaro’s inauguration. Meanwhile, other assets such as the Turkish lira continued to depreciate as positive inflation figures increased expectations of a loose monetary stance in the future,” said BBVA analysts. 

Banxico minutes 

The Bank of Mexico released the minutes of the latest meeting when the governing board decided unanimously to raise the key interest rate to 8.25%, the highest level in a decade. Banxico board members saw upside risks to inflation and consider that growth balance is tilted to the downside with global risks increasing. 

Key Quotes: 

“All members highlighted that since the last monetary policy decision, the prices of financial assets in Mexico continued to exhibit marked volatility. Most members coincided that in addition to the aforementioned external factors, such environment continued to reflect the uncertainty regarding the policies of the new administration, one of them stating that in his/her opinion, this latter factor has been the most relevant. Most members underscored the following as factors that have led to an environment of uncertainty: the intention to cancel the project of the New Mexico City International Airport, concerns about the business model of Mexico’s state-owned oil company (Pemex), and the potential effect of different legislative proposals. The majority pointed out that in such environment, the exchange rate has been under pressure, although some members mentioned that the operating conditions of the foreign exchange market remain adequate, while one of them added that the foreign exchange market has maintained stable levels of liquidity, depth and volume”

“All members agreed that monetary policy continues facing a complex situation, characterized by a high degree of uncertainty in which the balance of risks for inflation remains biased to the upside, in which some of the foreseen inflationary risks from a shortand medium-term perspective have materialized, and in which there is a possibility of medium- and long-term inflation expectations being affected. Most members stated that among the factors to consider for the monetary policy decision are: that non-core inflation remains high, affecting headline inflation and putting pressure on core inflation; that core inflation has shown a resistance to decline; that short-term inflation expectations have been adjusted upwards; and, that inflation risk premia has reached high levels.”

“The majority of the members considered that the balance of risks for the expected trajectory of inflation has deteriorated and remains biased to the upside, in an environment of marked uncertainty. Some members noted that, in an adverse external environment and with significant factors of domestic uncertainty, some of the risks to the upside for inflation have materialized.”