MEXICAN PESO OUTLOOK:
- Banxico expected to raise interest rates by 50 basis points to 6.50% to tackle soaring inflation
- The half-percentage point hike is fully discounted by market participants, so the focus will be on forward guidance and outlook for monetary policy
- If the central bank retains a hawkish bias, the Mexican peso may continue its recovery against the U.S. dollar, with USD/MXN possibly eyeing 19.85
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Banxico will announce its March monetary policy decision on Thursday. The market expects the central bank to raise the overnight rate by 50 basis points to 6.50% in an effort to counter soaring inflation, which reached 7.3% year-on-year in February, a nearly two-decade high. This would be the third half-percentage-point hike in a row, but the seventh consecutive adjustment during the normalization cycle that began in June 2021.
With headline CPI more than twice above the 3% midpoint goal and unlikely to converge with the target until 2024, near-term expectations becoming unmoored and the two-year breakeven inflation rate at the highest level since 2012 (5.3%), policymakers are likely to signal assertively that further tightening is on the horizon despite cooling activity.
A hawkish message will help cement bets that the bank will lift borrowing costs by at least what’s embedded in the curve: 300 basis points of cumulative hikes through the end of the year. This means that the official interest rate could end the year above 9%, one of the highest in the region. This outcome could be positive for the Mexican peso, but only to a certain extent, considering that the Fed is also withdrawing stimulus and the domestic macroeconomic backdrop is becoming increasingly challenging in terms of economic growth.
In Latin America, specifically in Brazil, the aggressive monetary policy adopted by the BCB’s Copom has been a great support for the Brazilian real, but it has not been the only reason for its significant appreciation against the US dollar in recent weeks. The other bullish catalyst has been the improvement in the terms of trade brought about by higher commodity prices (oil, grains, metals). Unfortunately, the same dynamic has not played out in Mexico, as the country mainly exports manufactured goods and is a net importer of oil.
Focusing on technical analysis, USD/MXN has fallen roughly 6% in the last two weeks, retracing most of the late February/ early March’s upswing to trade around the 20.15 mark, a key support zone. If sellers manage to breach this floor on the downside in the coming sessions, we could see a retest of the September 2021 lows near 19.85 provided the sentiment remains stable in the broader market.
On the flip side, if buyers return and prices inflect higher from current levels, the first resistance to consider appears near the 200-day simple moving average at 20.45, but if this ceiling is broken, USD/MXN could be on its way to reclaim the 20.90 level.
USD/MXN TECHNICAL CHART
USD/MXN chart prepared in TradingView
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—Written by Diego Colman, Contributor