USD/MXN tumbles after Banxico rises rates  by 50bp

The Mexican peso rose sharply in the currency market after the central bank of Mexico (Banxico) rose interest rate by 50 basis points from 3.75% to 4.25%, above market consensus of a 25bp hike.

According to the central bank, external conditions deteriorated significantly and could impact on inflation. Banxico expects the CPI to rise above 3% by year-end.  They will continue to monitor the exchange rate and it possible pass-through inflation. “The action seek to avoid that the depreciation of the national currency observed during the last months and the adjustment in some relative prices, translate into a de-anchoring of inflation expectations”, concluded the central bank.

Analysts were expecting a rate hike even before the Brexit referendum. The rally of that started in May from 17.20 worried central bank officials. Today the pair is falling sharply, losing more than 1% and moving further away from the record high intra-day levels it reached last week above 19.50.

Before the announcement, it was trading at 18.57 and recently bottomed at 18.17. The decline stopped slightly above June lows that area located at 18.07.