Mexican Peso steady ahead of inflation data, Banxico meeting

• The Mexican Peso trades steadily ahead of key inflation data. 
• Banxico will hold its meeting on Thursday; a 25 bps rate cut is expected.  
• USD/MXN claws higher from the base of a rising channel, supported by firm momentum. 

The Mexican Peso (MXN) fluctuates between tepid gains and losses in its major pairs on Tuesday, ahead of key inflation data later in the day, followed by the Bank of Mexico (Banxico) September policy meeting on Thursday - both factors that could influence the Mexican currency.

Mexican Peso to take cue from inflation data, Banxico meeting

The Mexican Peso has seen moderate weakening against both the US Dollar (USD) and the Pound Sterling (GBP) over the last few days, whilst against the Euro (EUR), it has traded mixed due to the single currency weakening on Monday on growth fears in the Eurozone. 

The Instituto Nacional de Estadística Geografía e Informática (INEGI) will release the 1st half-month inflation and core inflation for September on Tuesday at 12:00 GMT. 

The previous month's data showed a 0.03% decline in headline and a 0.1% rise in core inflation. If the new figures are higher, there is a possibility they could influence the Bank of Mexico decision. Higher inflation might increase the probability Banxico will leave interest rates unchanged, whilst lower inflation, that the central bank will cut interest rates.

Banxico currently holds its official interest rate at 10.75%, but this will probably change after Thursday's meeting. According to a recent Bloomberg survey, 20 out of the 25 economists and bank analysts believe Banxico will go ahead with a 25 basis points (bps) (0.25%) cut. Four analysts expect a 50 bps (0.50%) cut and only one that the central bank will leave interest rates unchanged. The expectation of lower interest rates is generally negative for a currency since it lessens foreign capital inflows. 

"We expect Banxico to cut the policy rate 25bp from 10.75% to 10.50% at the September 26th meeting," says Christian Lawrence, Senior Cross-Asset Strategist at Rabobank, in a recent note. "CPI inflation data released since the last meeting point to progress on a headline basis after the food-induced spike (August at 4.99%), and core inflation has now fallen to the top of the Bank's +/-1pp tolerance band around its 3% target," he added. 

Whilst some analysts have speculated that Banxico may be dissuaded from cutting rates to support the flagging Peso, which has lost over 10% of its value since June, Rabobank does not think this is the case. 

"The recent weakening of MXN will be of some concern for the Bank, given the potential pass-through to inflation. However, moves remain within recent ranges, and much of this can be attributed to the unwind of the carry trade. That said, the perceived rise in sovereign risk premium may support some further structural weakness in MXN, and we would argue that the risk of inflation from the currency has now flipped to the upside," says Lawrence.

At the August meeting, Banxico decided to cut interest rates by 0.25%, bringing its official rate from 11.00% to 10.75%. The decision, however, was a close call, with only three members voting for the cut versus two who wanted to keep rates unchanged. 

"Since that meeting, inflation readings have fallen further," says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman (BBH). "Next Banxico meeting is September 26 and if disinflation continues, another 25 bp cut to 10.50% seems likely.  The swaps market is pricing in 175 bp of easing over the next 12 months." 

Technical Analysis: USD/MXN edges higher, backed by bullish momentum

USD/MXN continues edging higher after bouncing off technical support at the base of a long-term rising channel.

The 50-day Simple Moving Average (not shown on the chart below) also bolstered support at the base of the channel. 

USD/MXN 4-hour Chart 

There is a possibility USD/MXN has begun a short-term uptrend within the channel. It is already in a medium and long-term uptrend, so the "current" is flowing north. 

The Relative Strength Index (RSI) has risen quite steeply since the market bottom on September 18, and this is a sign of underlying strength in the recovery. RSI has risen more sharply than the price, which is a sign of bullish convergence. 

A close above 19.53 (August 23 swing high) on a 4-hour basis would further confirm the pair was in a bullish short-term uptrend, which, given "the trend is your friend," would be expected to continue higher.