USD/MXN hits fresh daily lows under 20.40 amid a stronger Mexican peso

• Mexican peso among top performers the day after Banxico rate hike.
• USD/MXN having worst week since early December.

The USD/MXN is falling on Friday, erasing all of Thursday’s gains. It is trading at 20.39, at the lowest level of the day, on its way to the lowest daily close in a month the day after a new rate hike from Banxico.

The US dollar is lost momentum on Friday after rising sharply on Thursday on the back of CPI data and comments from Fed’s Bullard about the pace of rate hikes. Also emerging market currencies are recovering helped by a recovery in equity prices in Wall Street.

The Mexican peso is among the top performers on Friday. On Thursday the Bank of Mexico hiked the key interest rate by 50 bp to 6% as expected. One member of the board dissented, asking for a smaller hike. Banxico rose inflation forecast, keeping the doors open to another rate hike at the next meeting March 24.

“The Governing Board may be increasingly concerned with the developments in inflation expectations, though there was little material change in the forward looking component of their policy statement. This leaves some degree of uncertainty as to the probability of an equivalent hike at the next meeting, though we see that the dissent from Esquivel is now for a hike (of only 25bps), which leads us to believe that we'll get a further 50bps hike”, explained analysts at TD Securities.

The Mexican peso did not react to the upside on Thursday after Banxico but is gaining momentum on Friday. The USD/MXN peaked at 20.63 before turning to the downside. The consolidation below 20.40 could lead to a test of the 200-day moving average that stands at 20.32. On the upside, a break above 20.70 should strengthen the dollar.

Technical levels