Inflation, employment and other economic data in the United States have given tools to analysts so that they can anticipate the monetary policy decision of the Federal Reserve (Fed, for its acronym in English). At the moment, 82% of bets are on the 75 basis point raise, while 18% expect a 100 basis point surprise.
Today, Tuesday and tomorrow, the Fed’s Federal Open Market Committee (FOMC) will meet to decide the future of monetary policy given the high rate of inflation in the United States and in the world. This meeting will be key because the update of the economic outlook is also included, which would have a greater impact on the short-term behavior of currencies, including the Mexican peso.
According to data from the Bank of Mexico (Banxico), the exchange rate closed this Tuesday at a level of 19.9848 pesos per dollar with a slight appreciation of 0.05% compared to the previous day. In the year, it registers an average price of 20.26 pesos per dollar and an appreciation of 2.5%. The peso has found itself in a loop that hovers around 20 pesos, while the dollar has not shown significant changes after reaching 20-year highs in previous weeks.
If the increase of 75 basis points by the Fed is confirmed, in its statement on Wednesday, September 21 at 1:00 p.m., it will be the third consecutive rise of this level and would be in a range of 3% and 3.25%, the rate highest interest rate recorded in nearly 24 years. Economists and analysts anticipate that Jerome Powell and members of the central bank may increase the rate to 4% this year, and by 2023, up to 4.5%.
“For now, futures markets price the US interest rate at around 4.34% for April 2023. Such a high benchmark could support the US dollar and trigger an economic downturn,” OctaFX analysts said.
What will happen to the peso if the 75 basis points are achieved?
If the highest bet of 75 basis points is fulfilled, the Mexican peso will not present substantial changes, since the market would have discounted it. The Mexican currency will move at a level of 20.13 and 20.15 pesos as maximum points and a minimum of 19.93 pesos.
“The surprise would not come from there, I think it will be about the macroeconomic projections that will be updated and also in the document released by the Fed on a quarterly basis, where the focus will be on where the FOMC estimates that the maximum rate will be reached in this upward cycle, and if in 2023 a cut in the rate is contemplated, which is basically what the market is discounting, ”said Janneth Quiroz, deputy director of economic analysis at Monex.
The markets expect the rate to reach a level of 4.5% in December this year and to remain stable until at least the third quarter of next year. Attention will be focused on those estimates and if there is a surprise about what it can do at its next meeting in November, there would be a significant reaction of the Mexican currency.
“I believe that if this hawkish tone is reiterated and somehow a signal is sent that the rate could reach 4.75%, we could see a reaction of general loss of risk assets and the exchange rate could reach the levels of 20.30 units”, added Quiroz.
Given the recent higher-than-expected inflation reading, most investors expect the Fed’s tone to remain aggressive and vigilant, reiterating its primary focus on reducing inflation. However, analysts at consultancy Edward Jones noted that with equity markets falling sharply ahead of this week’s meeting, some of this aggressive message may already be being discounted.
How will the peso react to an increase of 100 basis points?
One of the scenarios to be considered is the surprising increase of 100 base points on the interest rate. Analysts mentioned that this would give strength to the dollar given the uncertainty of how far the Fed can go in its expectations already at the end of the year.
The reaction of the exchange rate in this scenario could be much stronger to the downside, the reaction of the peso would be a relatively strong depreciation to levels of 20.5 and close to 21 units per dollar, “since the difference between the rates The interest rate of both countries would be reduced, propitiating a slight aversion towards risky economies”, indicated Eduardo Ramos, financial markets analyst at ATFX.
James Salazar, deputy director of economic and stock market analysis at CI Banco, agrees and expects that, in case of surprise at 100 basis points, the reaction of the currency could be much stronger downwards and have a depreciation of 25 cents during Wednesday. , due to a new boost to the rise of the US currency, since the demand for the dollar will be favored again.
What if it was just a 50 basis point hike?
With an almost null probability, the 50 base point increase scenario would show a less aggressive Federal Reserve than expected and the Mexican currency could take a slight advantage over the dollar, due to the widening of the differential with interest rates. from Banxico.
Analysts expect that in the event of this scenario, the peso could reach levels of 19.80 units in the short term.
“If the increase were 50 basis points, an option that is really almost zero, we would have the exchange rate reach levels of 19.80 pesos, given that this scenario is not discounted and it would be a much more abrupt reaction than the other possibilities”, said the deputy director of Monex analysis.
In the next two days, several global central banks are also expected to raise their interest rates or indicate that they will maintain a restrictive monetary stance due to the upside risks for inflation, which also generates caution.
Gabriela Siller, director of economic analysis at Banco Base, said that two exceptions could be seen, in which they will probably be the Bank of Turkey, which has acted against economic theory by cutting interest rates despite high inflation, and the Bank of Japan. , which on past occasions has indicated that it will maintain a flexible stance due to low domestic inflation.