The Mexican peso was unable to offset the effect of the Federal Reserve’s (Fed) monetary policy announcement, which on Wednesday cut its interest rate by 50 basis points. This is the first reduction in four years by the Fed and was above the consensus of analysts, who predicted a reduction of only 25 basis points. Thus, the Latin American currency closed the session with a depreciation of 1% or 19 cents, compared to the previous day, trading at 19.29 pesos per dollar. Throughout the day, the exchange rate touched a minimum of 19.06 pesos and a maximum of 19.38 pesos per dollar. The US central bank’s cut was a given, but there were still doubts about how large it would be. In the end, Federal Reserve Chairman Jerome Powell opted for an aggressive cut of 50 basis points to bring the US interest rate to a range of 4.75% to 5%. An aggressive cut provides greater protection against a possible recession in the US, which in turn has led to more pressure on the Mexican currency.
Gabriela Siller, director of Banco Base, explained on her social networks that the depreciation of the peso was due to caution over the Federal Reserve’s monetary policy announcement and risk aversion regarding Mexico, following the approval of the reform to the Judicial Branch in the country. “The rate cut fuels interest rates in the US by 50 points, fuels speculation that the US economy could enter a recession and therefore, the exchange rate again showed upward pressure towards the close of the session,” says the specialist. This Wednesday, the peso was ranked as the second most depreciated currency in the broad basket of main crosses, only behind the Russian ruble, which lost 1.31%. In the broad basket of main crosses, the most depreciated currencies were the Russian ruble with 1.31%, the Mexican peso with 0.88% and the Swedish crown with 0.23%. Among currencies of Latin American economies, the Mexican peso was the most depreciated, followed by the Argentine peso with 0.12%.
All eyes in the financial world were focused on the Federal Reserve’s decision at noon on Wednesday. The Federal Reserve cut the interest rate by 50 basis points, to a range between 4.75% and 5%. The decision was not unanimous; Governor Michelle Bowman was in favor of cutting the rate by only 25 basis points. This was the first rate cut since the extraordinary meeting on March 15, 2020, where the rate was cut by 100 basis points. In their projections, the Fed members reduced the estimate of the reference rate at the end of 2024 to 4.4%, which will imply additional reductions of 50 basis points in the interest rate in the future. For 2025, the expectation is for a cut of 100 basis points during the year, so that the rate ends in a range between 3.25% and 3.50%.
Investors view large rate moves by the Federal Reserve as a sign that the U.S. central bank knows something they don’t, namely that the economy is in worse shape than it appears. So a larger rate cut could spook markets, especially in a climate like the current one, where a weak labor market and economic slowdown have raised alarm bells about a possible U.S. recession.
Jorge Gordillo, financial analyst at CI Banco, added that in a session marked by ups and downs, traders are assimilating the beginning of the easing of the Fed’s monetary policy. “The decision of the Federal Reserve has generated a mixed reaction among the markets, given that most traders anticipated a smaller drop,” he said.
The Fed’s decision comes a week before the Mexican central bank’s decision, scheduled for September 26. The market is waiting to see how much influence the Federal Reserve will have on the Bank of Mexico’s analysis, since this decision may define the rate differential between the two countries and lead to certain adjustments in the market. Currently, the Mexican central bank’s reference rate is 10.75%.
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