USD/MXN jumps to seven-week highs at 22.70 ahead of Banxico

• Mexican peso unable to find support versus US dollar.
• Banxico meeting: a 25bps cut expected as inflation stands above target.

The USD/MXN rose further and climbed to 22.70m reaching the highest level since August 8. In then pulled back and as of writing, it trades at 22.50, up 8% from the level it had a week ago.

The deterioration in market sentiment, technical factors and a weaker Mexican peso boosted USD/MXN. A week ago, the Mexican peso was outperforming. Now, it is the biggest loser of the last five days.

After CBRT, eyes on Banxico

Earlier on Thursday, the Central Bank of the Republic of Turkey rose the key rate by 200 basis point in order to stabilize the lira that plummeted to record lows. The crisis in Turkey has the potential to hit emerging markets.

In a few hours, the Bank of Mexico will announce its decision. Consensus point to a 25 basis point rate cut to 4.25%, on a move that could be the end of the easing cycle. The unexpected rise in inflation above the 4% target leaves Banxico with a limited capacity to keep lowering rates to boost the economy.

The recent rally of the US dollar in Mexico, rising in less than a week by more than 8%, could be something extra to consider for Banxico officials. A weaker peso, makes it more difficult for the central bank to ease further.

 “We expect Banxico to shift the pace of easing to 25bp cuts from the previously forecast of 50bps. The short term surge in prices, primarily due to the logistics and relative demand-supply impact of COVID-19, suggests that Banxico will become more focused on the risk to inflation and inflation expectations in the near term”, mentioned TDS analysts.

Technical levels