Anna 
The Mexican Peso (MXN) experienced modest fluctuations on Tuesday as traders exercised caution in anticipation of significant economic data releases and the upcoming policy decision from the Bank of Mexico (Banxico) later this week.
After several days of positive market sentiment supporting risk-sensitive assets like the Peso, optimism waned as Asian stock markets closed lower, influencing sentiment.
On the geopolitical front, initial optimism following a ceasefire agreement between Hamas and Israel was tempered by reports of Israeli military movements into the Southern Gazan city of Rafah.
At the time of reporting, currency exchange rates were as follows: USD/MXN at 16.88, EUR/MXN at 18.16, and GBP/MXN at 21.18.
Mexican Peso Trading Amidst Low Volatility Prior to Key Events
The Mexican Peso remained relatively stable as investors awaited the release of Mexico’s April inflation data and the Banxico policy meeting scheduled for Thursday. These events have the potential to introduce volatility into MXN trading.
The headline and core inflation figures are set to be announced on Thursday at 12:00 GMT. Forecasts anticipate a year-over-year increase of 4.63% for headline inflation, with a slower monthly rise of 0.18%. Meanwhile, core inflation is expected to decline to 4.40% year-over-year and 0.24% month-over-month.
Should the inflation readings exceed expectations, particularly core inflation which is considered more reliable, the Mexican Peso could strengthen. Higher inflation levels may prompt Banxico to maintain its current elevated interest rates for an extended period, attracting increased capital inflows.
Banxico Meeting: Potential for Unexpected Rate Cut?
The Bank of Mexico is scheduled to convene for its May policy meeting on Thursday at 19:00 GMT. Despite the hawkish tone observed in the March meeting minutes and the bank’s commitment to data-driven decision-making, market consensus leans towards Banxico maintaining the policy rate at 11.0%.
However, according to analysts at Trium Capital, even if Banxico opts to keep rates unchanged in May, a rate cut may be on the horizon shortly thereafter. Their argument centers on the adverse impact of high interest rates on Mexico’s GDP growth and economic activity.
Javier Basabe, an analyst at Trium Capital, emphasized the case for rate cuts amidst slowing economic indicators. Although February’s monthly economic activity exceeded expectations, it followed four consecutive months of negative prints since October.
Furthermore, the divergence between the Consumer Price Index (CPI) and Banxico’s policy rate suggests an increased likelihood of rate cuts. This disparity has also driven bond markets to extremes, potentially setting the stage for a mean reversion.
Basabe concluded that while the hawkish Banxico minutes may not signal the start of a rate-cutting cycle in May, the prevailing economic conditions, including record deficits and high spending, may prompt future rate reductions even if the bank maintains rates this month.
