MEXICAN PESO OUTLOOK:
- Mexico’s August inflation was mixed, but largely in line with Banxico’s recent projections
- Lack of a major upside surprise on the CPI front may lead the central bank to maintain monetary policy unchanged at its September meeting
- Near term, USD/MXN could trade with a neutral bias unless risk-off sentiment hits the market
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Mexico’s annual headline CPI cooled slightly to 5.59% in August from 5.81% in July, but the the core indicator accelerated from 4.66% to 4.78%, a sign that price pressures may still be broadening out. However, both metrics came mostly in line with consensus and Banxico’s recent forecasts in its quarterly report.
The fact that consumer prices did not deviate significantly from the central bank’s baseline may keep inflation expectations in check and give policymakers more cover to wait a bit longer before raising borrowing costs again. All of this suggests that Banxico may stay on hold and leave its benchmark interest rate unchanged at 4.50% at its September meeting, absent any surprises on the inflation front (on September 23, we will get a fresh look at the inflation trend with the bi-weekly CPI report).
All else equal, a less aggressive tightening stance may limit gains by the Mexican peso, keeping the USD/MXN exchange rate anchored around its current levels (19.95), just below the 20.00 mark.
On the other hand, while it is true that the broad US dollar (DXY) has been trending lower of late, it would be difficult for MXN to take advantage of this situation as the source of its counterpart’s weakness is economic deceleration. In general, any slowdown in the US may have a large negative impact on the Mexican economy through the trade channel, as Mexico sends about 80% of its exports to its northern neighbor.
All in all, USD/MXN may fluctuate with neutral bias in the near-term, at least for the next few weeks until there is more clarity on the monetary policy outlook from the Fed and Banxico, as both central banks will announce their decision towards the end of the month. This will likely mean choppy and uninteresting price action through next week.
However, it is important for traders to keep a close eye on sentiment and cross assets as Wall Street analysts continue to warn of a correction in the equity space amid extreme investor complacency and seasonal weakness. Should a significant pullback in stocks occur, EMFX could be the first casualty of a flight-to-safety move. In this case, USD/MXN could spike higher in the blink of an eye and easily retest its August highs or climb even higher if risk-off lingers.
USD/MXN TECHNICAL OUTLOOK
USD/MXN has edged lower after breaking below its 200-day moving average and is now sitting near technical support in the 19.80 area. If sellers manage to pierce this floor, price could correct lower and trigger a drop towards the 2021 low at 19.55.
On the other hand, if USD/MXN reverses higher unexpectedly, the 200-day SMA (20.10) appears to be the first barrier capable of halting any rallies. However, if we see a move above this level, a medium-term descending trendline near 20.35 will become the immediate focus.
USD/MXN TECHNICAL CHART
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—Written by Diego Colman, DailyFX Market Strategist