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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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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