USD/MXN ends week higher above 19.00 as Mexican peso weakens

• Mexican peso among worst performers over the week affected by Pemex downgrade. 
• US dollar losses strength against emerging market currencies on Fed’s patient stance. 
• Banxico meets on Thursday: no change is expected. 

The USD/MXN is about to post the first weekly gains after falling during seven weeks in-a-row. The recovery remains modest and took place on the back of a weaker Mexican peso. The pair failed to continue its decline despite US dollar weakness. Late on Tuesday, Fitch downgraded Pemex ( state-owned petroleum company) debt by two notches and pushed Mexican assets to the downside. 

The rally of the Mexican peso eased, and the greenback recovered ground modestly. Still, the main trend points to the downside but a firm break under 18.85 is needed for the peso to resume its rally. 

Since Wednesday, USD/MXN is moving around 19.10 without a clear direction. It traded below 19.00 several times, but it was rejected and climbed back on top. To the upside, it remains limited by the 19.20 area. The mentioned level has become a key resistance and a break higher would clear the way to more gains for the US dollar.  

Key event ahead: Banxico meeting

Last Wednesday, the Federal Reserve as expected kept interest rate unchanged. The FOMC took a dovish shift, leaving the rate hike cycle on hold. It even mentioned that could adjust the balance sheet reduction program. What the Fed did, fueled the demand for riskier assets and eased the pressure for Banxico to raise rates again. 

Next Thursday the Bank of Mexico meets. Most analysts expect no change in rates. The slowdown in inflation, the appreciation of the exchange rate and a decline in market’s volatility, are the main arguments for keeping the key rate on hold, at 8.25%, the highest level in a decade. 

According to analysts at Commerzbank, there are arguments in favor and against a rate hike. “If it does not raise this time, the risk of further tightening of interest rates in the coming months remains high. Therefore, the central bank is likely to continue to strike a hawkish note, which should protect the peso from a significant depreciation”, they concluded.