Prior to Banxico's meeting, Mexican peso trades with lower volatility than usual.

The Mexican Peso is oscillating between mild gains and losses ahead of Thursday’s Banxico meeting, while Mexican April inflation data could add further fluctuations to its value. Trium Capital analysts believe there may be greater chances for interest rate cuts than markets are pricing in.

On Tuesday, the Mexican Peso (MXN) traded between slight gains and losses as traders wait in anticipation for key inflation data and Bank of Mexico policy meeting decisions on “super” Thursday.

Last week’s optimistic market sentiment, which had helped buoy risky Peso currency, finally dissipates as Asian stocks finished their day broadly lower.

Geopolitically, sentiment improved after Hamas agreed to a ceasefire agreement with Israel; however, these feelings quickly vanished when Israeli units moved into Rafah city, Southern Gazan region.

At time of publishing, USD/MXN is trading at 16.88; EUR/MXN stands at 18.16 while GBP/MXN was estimated to have hit 21.18.

Leading up to key events, the Mexican Peso trades with low volatility.

The Mexican Peso remains unchanged ahead of April inflation data release and Banxico meeting on Thursday; both events can create high degree of market instability for MXN.

On Thursday at 12:00 GMT, both headline and core inflation rates will be released simultaneously. Headline Inflation should show an expected annual reading of 4.63% with only an expected monthly increase of 0.189%.

Core inflation rate forecast to decline year over year by 4.40% and by 0.224% month on month.

If either inflation component, but particularly core inflation – considered more accurate by many economists – surpasses expectations, the Mexican Peso could experience strength. Higher levels of inflation will force Banxico to keep interest rates at current elevated levels for longer and therefore attract greater capital flows into Mexico.

Banxico Meeting – Is This A Surprise Cut?

On Thursday evening at 19:00 GMT, Banxico will hold its May policy meeting. Based on its hawkish minutes from its March meeting and commitment to data-dependent approach as well as recent economic indicators that indicate strength in economic data production, most analysts anticipate keeping its policy rate unchanged at 11.0%.

Trium Capital contends that, even if Banxico doesn’t reduce interest rates in May, they likely will soon after. Their main argument centers around two key aspects: (1) higher interest rates are hindering economic activity in Mexico by slowing GDP growth rate significantly and economic activity substantially and (2) high rates hinder GDP growth rates substantially and economic activity furthermore.

“Sluggish economic activity supports the case for cuts. February saw an unexpectedly strong monthly economic activity indicator at 1.38% MoM against an estimate of 0.50,” noted Trium Capital analyst Javier Basabe. This result was after four consecutive negative prints since October.

Second, Consumer Price Index (CPI) over time has drifted so far away from Banxico’s policy rate that this makes further cuts more likely and has sent bond markets into extremes, making a mean reversion more probable.

“In our view, arguments regarding hawkish Banxico minutes are misplaced. While it could signal that we may not be at the start of another cycle and rates might remain unchanged at May meeting? Sure. Does that matter much though? No; slow growth coincides with record deficit and spending levels which will be cut next year further dampening growth.” Even if Banxico keeps rates unchanged next month there may still be cuts ahead according to Basabe.

Technical Analysis: USD/MXN in short-term range and may continue its downward slide

USD/MXN – the cost of one US Dollar measured in Mexican Pesos – continues to move toward the bottom of its short-term range since April 19’s highs, oscillating between an approximate floor level at 16.86 and ceiling levels near 17.40.

USD/MXN 4-hour Chart
As per the old maxim that “the trend is your friend”, short-term trends appear to be sideways and it should continue this way for now.

Although prices made several attempts at breaking through their range floor, bearish pressure was insufficient, leading them back into its range again.

Overall, there is an overall bearish outlook due to medium and long-term trends both pointing in a downward direction – both having significant influences over shorter term prospects.

An upward rebound within its range is anticipated and could take the USD/MXN back towards its 50 Simple Moving Average on the 4-hour chart at 17.06, before continuing onto reach 17.15 lower high and beyond if resistance zone between 17.15-17.18 breaks away completely allowing further gains up towards range highs again.

An unexpected breakout of either of the ranges – either below 16.86, or 17.40 would change the pair’s directional bias and the way in which its movements unfold.

An unexpected break of the floor could trigger further losses with targets at 16.50, followed by April 9’s low of 16.26 as potential targets.

On the flipside, breaking above the top would trigger an upside target first at 17.67 and perhaps beyond to approximately 18.15.

An indication of an impending break would be an unusually long green or red daily candlestick which penetrated above or below its range high or low and closed close to it; or three green/red candlesticks which simultaneously penetrated these levels.

Banxico FAQs
The Bank of Mexico, commonly referred to by its Spanish acronym Banxico, serves as Mexico’s central bank and plays an essential role in protecting and setting Mexico’s currency, the Mexican Peso (MXN). Their primary mission is achieving low and stable inflation within target levels – targeting between 2%-4% over their tolerance band of tolerance range – so as not to undermine Mexico’s currency value and economic policy goals. Their key aim is sustaining low and stable inflation within target levels – specifically between target levels 3%- 4% target levels within target levels tolerance bands between 2%- 4% tolerance bands! To accomplish their main mission a primary aim must be maintained. Inflation target levels must remain low and stable with target levels being achieved or close 3% as their main goal! To that end their main aim must remain low and stable inflation between target levels 3-6 percent tolerance bands between 2-4 percentage points as per target target set as their main objective! To do this end objective can easily achieved as Banxico provides central bank functions by maintaining value by controlling currency inflation within target levels with its target goal at or close – its primary aim being 3% targets or close – whilst targeting stability within targets set between tolerance bands of between 2- 4% tolerance bands between 2- 4% set when considering any desired or close enough at target, for the midpoint between tolerance band threshold values set within tolerance bands between 2- 4% tolerance range set target level target is achieved or near to ensure low and target inflation should remain within target levels (with tolerance bands of 2-4% tolerance bands of between 2-4% tolerance limits (with tolerance bands between 2-4) (target being maintained at target.) with inflation held steady within target levels or close or near target or close enough target being within tolerance band between 2- 4.

Banxico uses interest rate setting as its primary tool in managing monetary policy. If inflation goes beyond target levels, they attempt to control it by raising rates on consumers and businesses borrowing money – ultimately cooling the economy and helping strengthen MXN against USD as higher yields create attractive investment environments; lower interest rates weaken it however; the rate differential with Fed is an essential element here as both sets set rates accordingly.

Banxico meets eight times each year and its monetary policy decisions are heavily impacted by those made at the US Federal Reserve (Fed). Therefore, their central bank’s decision-making committee typically convenes within a week after each Fed announcement to react or even anticipate measures set forth by them; for example during and following Covid-19 pandemic outbreak Banxico raised rates first to limit devaluation risks as well as prevent capital outflows that might disrupt national stability.