Currency Analysis Report 7/12/20 – Mexico’s Central Bank Rate Should Remain Steady

Several months ago, Mexico’s central bank cut the benchmark interest rate to its lowest level in three-and-a-half years as the country fell into a recession that economists say will be the worst in decades.

The move followed two unscheduled rate cuts of half point each in March and April as the normally hawkish central bank moved quickly to contain the impact of the pandemic and plunging oil prices.

This was about the same time that Mexico’s approach with regards to COVID-19 was to mainly test only those with severe symptoms, while monitoring people with suspected, but undiagnosed cases of Covid-19. At the time, Mexico had 40,000 cases with 4,000 deaths, but Deputy Health Minister though the numbers were 8X what was being reported.

This past week, Mexico had a record for new coronavirus cases reported on a single day, overtaking Spain in case count. Mexico now has over 250,000 cases with close to 1,000 deaths. But again, the government said the real number of infected people and deaths is likely significantly higher.

Just like the US is experiencing a similar situation in the Southeast, Mexico City, the epicenter of the virus loosened restrictions and reopening for business two weeks ago, there have been no signals the virus was on the rise.

Bank of America revised its inflation forecast for Mexico this year to 4%, from 3.7% previously, the bank said in a research note, adding that the current climate makes further interest rate cuts by the central bank more difficult.

With the U.S. presidential election in the second half of 2020, fiscal concerns in Mexico and the coronavirus still spreading, Bank of America said Banxico's key overnight lending rate should stay at around 5% for the remainder of the year due in part to core inflation remaining above the central bank's 3% target.

The pull back in the USD/MXN in recent month has largely been due to the rebound in oil prices.

However, the next move for the Mexican Peso will be pending the next move in the US dollar. The sell-off in the US dollar over the last several weeks has been due to COVID-19 running rampant in the Southeast to the point of state government officials delaying the reopening and in some cases re-shutting down local economies. However, a bounce in the US dollar is inevitable at least in the short term.

If I was a betting man, my money will be reopening the economy fully is going to harder said then done. Thus, I see the US dollar regaining its safe haven status as Fall approaches and so think what we see on the chart might just be a pull back, before the continuation higher. However, a drop below 21.5000 and this thesis is off the table.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

Posted Using LeoFinance