Banco de Mexico, known as Banxico, reduced interest rates by 25 basis points to 7.25%. This decision was made in a 4-1 vote, with Deputy Governor Jonathan Heath wanting rates to stay at 7.50%.
The Governing Board’s statement suggests ongoing rate cuts, assessing current inflation. Interest rates may pause amid inflation concerns, with inflation possibly reaching a 3% target by Q3 2026. The USD/MXN rate dropped slightly following the decision, with potential moves dependent on technical levels.
Banxico’s Mandate
Banxico’s mandate is to maintain low and stable inflation, targeting 3%. Interest rates are crucial in their monetary policy to manage the economy. Higher rates control inflation by making borrowing difficult, strengthening the Mexican Peso. Lower rates typically weaken the currency.
Banxico’s policy meetings, occurring eight times yearly, are influenced by the US Federal Reserve’s decisions. Often meeting a week after the Fed, Banxico aligns its strategy, occasionally acting pre-emptively. Their aim is to stabilise the Peso and avoid financial instability post events like Covid-19, acting before the Fed to bolster economic resilience.
With Banco de Mexico cutting its rate to 7.25%, the key takeaway is the dissent in the 4-1 vote and the new cautious language. This signals a potential pause in the rate-cutting cycle, which we see as supportive for the Mexican Peso. The immediate, though minor, strengthening of the MXN against the dollar reflects this view.
The central bank’s updated forecast, which sees inflation only hitting its 3% target in the third quarter of 2026, gives us a strong reason for this potential pause. Recent data backs this up, as we saw Mexico’s inflation for October 2025 come in at a stubborn 4.1%, remaining above the bank’s tolerance band. This persistent inflation makes further rate cuts in the near term less likely.
Strategies for Traders
For derivative traders, the interest rate differential between Mexico and the United States remains a crucial factor. With the US Federal Reserve holding its own rate steady at 5.00%, the 225-basis point spread continues to make the peso attractive for carry trades. This fundamental support should provide a floor for the MXN, even with Banxico’s latest cut.
We remember how Banxico proactively hiked rates starting back in 2021, well ahead of the Fed, to protect the peso. This history suggests they will prioritize currency stability and will not risk rapid cuts that could weaken the MXN, especially if the Fed remains on hold. Their past actions show a clear preference for a strong and stable currency.
Given this outlook of a stable-to-stronger peso, we believe selling out-of-the-money call options on the USD/MXN pair is a viable strategy. This approach profits from range-bound price action or a decline in the pair, capitalizing on the view that a significant spike above 19.00 is improbable in the coming weeks. The high interest rates also mean option premiums should remain attractive for sellers.
We must watch the technical levels closely for confirmation of this trend. A break below the 18.46/48 area would signal further peso strength, potentially targeting the yearly low of 18.19. Conversely, a sustained move above the 18.60 level would challenge our view and suggest that peso weakness could resume.
