Mexican Peso Supported by Hawkish Banxico Bets
The Mexican peso rebounded to 18.6 per USD from 17-month low of 18.86 on October 29th as higher inflation supported a hawkish Banxico. Annual inflation rose to 3.75% from 3.45% in September, above forecasts of 3.65%, moving further above Banxico’s 3% target. Core inflation edged up to 3.80% from 3.75%, broadly in line with forecasts of 3.78%. Elevated inflation could prompt Banxico to adopt a more restrictive stance, supporting the peso by widening the US-Mexico rate differential and favoring peso-denominated carry trades. However, Banxico unexpectedly cut its benchmark rate to 6.25% at its latest meeting and revised forward guidance, signaling rates would remain at the new level for an “extended period.” Meanwhile, Democratic midterm wins in the US could constrain some of President Trump’s foreign trade policy decisions, supporting the peso. USMCA-compliant goods were exempted from Trump administration tariffs, additional tariffs remained on steel, aluminum and automotive imports.
The Mexican peso rebounded to 18.6 per USD from 17-month low of 18.86 on October 29th as higher inflation supported a hawkish Banxico. Annual inflation rose to 3.75% from 3.45% in September, above forecasts of 3.65%, moving further above Banxico’s 3% target. Core inflation edged up to 3.80% from 3.75%, broadly in line with forecasts of 3.78%. Elevated inflation could prompt Banxico to adopt a more restrictive stance, supporting the peso by widening the US-Mexico rate differential and favoring peso-denominated carry trades.
However, Banxico unexpectedly cut its benchmark rate to 6.25% at its latest meeting and revised forward guidance, signaling rates would remain at the new level for an “extended period.” Meanwhile, Democratic midterm wins in the US could constrain some of President Trump’s foreign trade policy decisions, supporting the peso. USMCA-compliant goods were exempted from Trump administration tariffs, additional tariffs remained on steel, aluminum and automotive imports.