The Banco de Mexico (Banxico) released meeting minutes indicating a slowing economy and potential for further monetary easing. Board members noted increased economic slack and downside risks to inflation.
The USD/MXN exchange rate may test 20.00 if support at 20.30 breaks, with upward movement only resuming above 20.50. The board’s consensus views the balance of risks to economic activity as negative.
Banxico’s Monetary Policy Goals
The Bank’s goal is to maintain low inflation around 3%. It sets interest rates to influence the economy, with lower rates generally weakening the Mexican Peso.
Banxico meets eight times yearly, often after the US Federal Reserve, aligning policy responses to external conditions.
Banxico’s latest meeting minutes showed a clear leaning towards a more dovish stance, framed by growing concern among board members about decelerating growth and softening inflation pressures. It’s evident from their comments that the domestic economy is facing headwinds. They referred directly to widening economic slack – in plain terms, more idle capacity and less demand. This normally means reduced pressure on prices, giving the Bank room to consider interest rate cuts in the near term.
There’s no ambiguity in the tone of the board: risks to both inflation and economic activity are tilting to the downside. That makes the likelihood of further monetary easing greater in the months ahead. Inflation, still above the medium-term target, is decelerating slowly. Banxico is aiming for a stable level near 3%, and if data shows it’s drifting lower than expected, policymakers could act sooner than some may anticipate.
Exchange Rate and Global Impact
As expected, the peso responded with weakness following the release. From a trading perspective, technical support around 20.30 in the USD/MXN pair remains under pressure. A break below this level could pave the way for further peso depreciation, potentially testing the psychological zone around 20.00. However, a reversal – which seems unlikely without a shift in sentiment or macro data – would require a move back through 20.50 and sustained momentum.
Given the alignment of Banxico’s policy meetings with those of the US Federal Reserve, the next Fed decision also casts a long shadow on the peso’s direction. While the Fed remains focused on its inflation mandate, divergence between the two banks’ trajectories could widen in the short term. If US rates stay higher for longer, while Banxico leans towards easing, the carry advantage of the peso diminishes, removing one of its prior supports.
Given all this, markets will likely be reactive to forward-looking commentary from both central banks. For those of us watching derivatives, where positioning is already reflecting anticipation of looser Mexican policy, implied volatility may rise on any deviation from this script. Monitoring rate expectations and inflation data in Mexico becomes essential. But even those are secondary to the broader swings in risk appetite stemming from global growth dynamics and US dollar strength.
In this setting, one has little choice but to closely follow incoming data and adjust to moves in positioning rather than prediction. Rate spreads and real yields may tell us more than outright FX levels at this stage. With headline inflation softening while core remains somewhat sticky, the balance that Banxico must strike is bound to get tested.
