There is a lot of focus today on whether Banxico will cut its high policy rate to 10.75% from 11.00% when it meets tonight. It has been on hold since it started its easing cycle in March, and economists are split down the middle on whether it will cut, ING’s FX strategist Chris Turner notes.

USD/MXN to trade over 20.00 again

“Those in favour of a cut argue that real interest rates do not need to be this high anymore and that Banxico can resume an orderly softening of restrictive policy; those against a cut argue that the peso has been front and centre of the carry trade unwind and that a cut could prompt USD/MXN to trade over 20.00 again, destabilising local asset markets.”

“We do not have a strong view here, but perhaps a hold under the next meeting on 26 September – a week after the Fed decision – might prove appealing to Banxico. If so, and assuming there is some stability in global risk assets and USD/JPY, USD/MXN could drop into the 18.85/19.00 area.”

“However, we are fearful of Mexican politics again weighing on the peso in September when the new parliament will discuss constitutional reforms. We struggle to see USD/MXN trading sustainably below 18.50 over the coming months.”