ING’s Chris Turner notes that Banxico’s 25 bp rate cut to 6.75% came with largely unchanged inflation forecasts and a projection of a return to target in early 2027. He argues that easing policy in the current environment is risky and suggests the Peso remains vulnerable, with scope for USD/MXN to correct higher on negative Middle East news.

Rate cut questions Peso resilience

"Banxico mildly surprised the market by cutting the policy rate 25bp to 6.75% yesterday. Somewhat surprisingly, its inflation forecasts were little changed since February (just 0.1/0.2% modest increases for headline and core CPI year-on-year rates). And it still forecast inflation returning to target at 3.00% in early 2027."

"Cutting rates in the current environment is a little dangerous and does suggest that Banxico is slightly less concerned about currency weakness than many other emerging market central banks."

"We had felt earlier this year that Banxico would not want to see USD/MXN trading well under 17.00 again. As a big EM beast and a proxy hedge for the EM complex, we think the peso remains vulnerable."

"Some poor news out of the Middle East could now see USD/MXN correct back up to the 18.50/70 region."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)