Mexican Peso continues rising on interest rate divergence

The Mexican Peso has developed a long-term uptrend on the back of relatively high interest rates in Mexico, which help attract inflows of foreign capital. 

Although the Banxico cut its Overnight Interbank Target Rate from 11.25% to 11.00% in March, it did so without committing to further rate cuts. 

The move came on the back of lower trending inflation, however, the meeting minutes revealed the view that the balance of risks continue tilting in favor of inflation remaining stubbornly high going forward. This will likely require the Banxico to keep interest rates at their relatively high level, continuing to underpin the MXN. 

This week sees the release of Industrial Production and Retail Sales data on Thursday and Friday respectively, for Mexico. Neither are in themselves likely to move the Mexican Peso, but they will provide more intelligence on the performance of the economy. 

High-than-expected macroeconomic data will likely buttress the Mexican Peso. Banxico said that despite higher interest rates, the economy continues showing a high degree of “dynamism” and resilience and data that backs up that view. This will probably mean the central bank keeps interest rates at their relatively elevated level for longer.