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USD/MXN Rises As Mexican Central Bank Cuts Interest Rates Again

September 25, 2020 at 17:28 by Andrew Moran

USD and MXP one hundred billsThe Mexican peso is struggling to find support against several major currency rivals after the central bank cut interest rates for the 11th consecutive month. The Mexican economy has been slumping as the country fails to contain the coronavirus pandemic, with the number of new infections rising thousands per day. Despite the peso making gains this past summer, it has been one of the worst-performing Latin American currencies this year.

On Thursday, the central bank slashed its benchmark rate by 25 basis points to 4.25% during the September policy meeting. Policymakers have been easing monetary policy every month since August 2019, bringing borrowing costs to their lowest levels since August 2016.

But officials will have a hard time trying to rein in inflation as it spurs economic growth. The annualized inflation rate surged from 3.62% in July to 4.05% in August, remaining well above the 3% target rate. The mid-month inflation rate for September jumped 0.16%, higher than the expectation of 0.12%. The mid-month core inflation rate also picked up 0.17%.

The central bank alluded to uncertainty and downside risks in the broader economy, noting that there is very little room for maneuvering. Leaders were, however, pleased by improving data in June and July.

Taking into account the referred risks for inflation, economic activity and financial markets, major challenges arise for monetary policy and for the economy in general.

Mexico fell into a recession last year, and analysts forecast the gross domestic product (GDP) will crash by up to 10.5% this year.

On the data front, economic activity advanced 5.7% in July, coming in better than the median estimate of 5.2%. This is down from the 8.8% jump in June. Economic activity has plunged 9.8% year-over-year.

Earlier this week, it was reported that retail sales rose 5.5% in July, slightly worse than the market forecast of 5.7%. This is down from the 7.8% boost in the previous month. Retail sales have also plummeted at an annualized rate of 12.5%.

Mexico has experienced more than 715,000 confirmed cases of COVID-19, with a death toll of about 75,000.

The USD/MXN currency pair surged 1.1% to 22.3997, from an opening of 22.1547, at 17:23 GMT on Friday. The EUR/MXN advanced 0.7% to 26.0346, from an opening of 25.8577.

If you have any questions, comments, or opinions regarding the Mexican Peso, feel free to post them using the commentary form below.

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