USD/MXN: pros trim their peso bets ahead of Banxico decision

The USD/MXN exchange rate will be in the spotlight on Thursday as the Mexican Central Bank delivers its interest rate decision and as the country publishes its inflation report. The pair was trading at 16.9, down from this month’s high of 17.95.

Mexico's central bank decision

The Mexican Central Bank will deliver its fourth interest rate decision of the year on Thursday as it seeks to recharge an economy that is slowing down. 

Most economists believe that the bank will leave interest rates unchanged at 11.0% as it continues to observe the inflation trends. It slashed rates by 25 basis points in its meeting in March.

Thursday’s meeting is notable since it will come a few hours after the statistics agency publishes the country’s inflation report. Economists polled by Reuters expect the report to reveal that Mexico’s inflation rose slightly to 4.63% in May from the previous 4.42%.

Mexico’s inflation has been falling gradually after peaking at almost 9% in 2022. That happened as the central bank hiked rates from 4% in January to 11.25%.

There are signs that the Mexican economy is slowing, which explains why the central bank has turned dovish. The most recent report revealed that the economy grew by just 1.6% in Q1 after growing by 2.4% in the previous quarter. Another report showed that the jobless rate rose slightly in April to 2.70%.

Mexico’s central bank decision comes a week after the Fed left interest rates unchanged between 5.25% and 5.50%. Officials hinted that a rate cut will still come later this year, a view that was confirmed by a series of weak US data like jobs and consumer confidence.

Meanwhile, hedge funds and other speculators have trimmed their bullish bets on the Mexican peso. The CoT report by the CFTC showed that the positioning dropped to 119k from 123k a week earlier. It had peaked at almost 140k in April, as shown below. 

Still, these funds have been bullish on the currency since March 2023, a trade that has been profitable as the currency has jumped by over 11%.

USD/MXN forecast

USD/MXN chart by TradingView

The USD to MXN exchange rate peaked at 17.95 on April 15th and has now pulled back to 16.95. It is consolidating at the 50-day and 10-day Exponential Moving Averages (EMA). The two lines of the MACD indicator have formed a bearish crossover while the histogram has dropped below the neutral point.

Therefore, the pair will likely rebound since the Banxico could decide to slash interest rates. If this happens, the key level to watch will be 17.40, its highest point on April 25th. A drop below the support at 16.8 will invalidate the bullish view.