US dollar up strong against Mexican peso ahead of central bank rate decision

Banco de Mexico expected to extend rate cuts, further eroding big positive carry into peso. Foreign holdings of Mexican debt have fallen sharply this year despite highest real interest rates of any major economy.

The US dollar is trading higher against the Mexican peso, extending this week's strong gains in anticipation that Mexico's central bank will decide to continue easing monetary policy with a rate cut to be announced this afternoon.

The Banco de Mexico (BdeM) is expected to cut its key official rate by a quarter point to 7.50%, the third straight easing move this year. The central bank is reacting to reductions in Mexico's inflation rate, as well as near recession rates of economic growth. Mexico was widely expected to enter a recession in the third quarter, but instead managed eke out GDP growth of 0.1%.

Economists generally expect the BdeM to continue easing monetary policy well into next year, with some seeing the official rate droppping to 6%, further eroding the attractiveness of Mexican fixed income assets and thus reducing the positive carry spread. Some forecasts see the peso moving above 21.00 per dollar, down from its current level around 19.50.

USD/MXN Strong Rally

USD/MXN has seen a strong rally this week, moving higher every session. The US dollar is up about 2% on the week against the peso.

Foreign investors have been dumping Mexican fixed income assets, their share of the Mexican debt market has fallen from 63% at the start of year to 55%, despite the fact the Mexico has the highest inflation-adjusted interest rates of any major economy, except for crisis ridden Argentina and Turkey.

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