Insights 
VT 
Banco de Mexico (Banxico) recently disclosed the minutes from its September 25 meeting where it reduced interest rates by 25 basis points to 7.50%. This marks the lowest rate since May 2022, with the decision facing opposition from Deputy Governor Jonathan Heath, who cited potential inflationary impacts from proposed tariffs on Chinese imports.
The minutes indicate further rate cuts might be considered by assessing economic factors such as the USD/MXN exchange rate and the effects of tariffs. Most board members observed that inflation remains below its historical average, with some noting the impact on core inflation from livestock product price shocks.
Influence Of Interest Rates On Mexican Peso
The Bank of Mexico aims to preserve the value of the Mexican Peso and maintain inflation at around 3%. It influences the Mexican Peso through interest rate adjustments, with higher rates generally strengthening the Peso by attracting foreign capital. Meetings occur eight times a year, often shortly after the US Federal Reserve’s gatherings, affecting Banxico’s policy responses.
The bank’s actions, such as rate adjustments, are closely linked to the Fed’s decisions, demonstrated by Banxico’s proactive rate increases post-Covid-19 to protect the Mexican Peso from depreciation.
The recent minutes from the September 25th meeting show that most of Banxico’s board is open to cutting rates again, following the move to 7.50%. This view is supported by the latest inflation report from earlier this week, which showed headline inflation easing to 3.8% in September, moving closer to the bank’s target range. As a result, we are seeing the market price in a higher probability of another 25 basis point cut at the next meeting in November.
Potential Impact On The Peso
For those trading the peso, this dovish tilt suggests potential for further weakness against the US dollar. Since the late September rate cut, we have seen the USD/MXN pair climb from around 17.80 to its current level near 18.15. With the US Federal Reserve holding its own rates steady for now, the attractive rate differential that has supported the peso throughout 2024 and early 2025 is shrinking.
We believe traders should consider positioning for a weaker peso, possibly by buying USD/MXN call options or call spreads to manage cost. These strategies could benefit if the central bank follows through with another cut, especially with the recent data showing Mexico’s IGAE economic activity index contracted slightly in August. Implied volatility on peso options has ticked up slightly but remains below the highs we saw back in 2023, suggesting protective positions are still reasonably priced.
However, the decision to cut was not unanimous, and this points to a key risk for short-peso positions. Deputy Governor Heath’s concern over potential inflation from proposed tariffs on Chinese goods remains a wild card, especially as trade talks last week did not yield a clear resolution. Any surprise acceleration in inflation or a sudden implementation of those tariffs could force the bank to pause its cutting cycle, causing a sharp reversal in the peso.
