The Bank of Mexico, known as Banxico, lowered interest rates from 7.25% to 7% after a 4-1 vote. Deputy Governor Jonathan Heat disagreed and wanted to keep rates the same. Banxico’s board will review future rate changes while monitoring the inflation target, expected by the third quarter of 2026. The exchange rate of the US Dollar to Mexican Peso (USD/MXN) hardly changed, remaining around 18.00.

Bank Meetings and Influence

Banxico meets eight times a year and pays close attention to the US Federal Reserve’s decisions, usually holding its meetings a week later. The bank uses interest rates to control inflation, aiming to keep it between 2% and 4%. Higher interest rates can attract more investment, strengthening the Mexican Peso, while lower rates might cause it to weaken. Banxico acted quickly to stabilize the peso after the Covid-19 pandemic, sometimes even before the US Fed made changes. Banxico’s job is to maintain the value of the Mexican Peso and ensure inflation stays within target levels. Its decisions can significantly impact Mexico’s economy and how confident investors feel.

Market Reactions and Strategies

The recent rate cut to 7.00% by the Bank of Mexico was expected, which is why the market’s response in the USD/MXN pair was muted. This marks the start of a gradual easing cycle rather than a series of aggressive cuts. The latest inflation data for November 2025 is at 4.1%, supporting the central bank’s cautious approach. A key consideration is the rate difference with the United States, which stands at 250 basis points. The US Federal Reserve has kept its benchmark rate at 4.50% for the last two meetings, citing ongoing core inflation of 3.8%. This large gap makes holding the Mexican Peso appealing for carry trades. Since this decision was widely anticipated, implied volatility in USD/MXN options has likely decreased, making strategies like selling out-of-the-money calls an attractive way to earn income. This will work well if the pair stays below crucial resistance, such as the 18.07 level. For those expecting a change in direction, lower volatility also makes buying long-dated calls a less expensive option to bet on a weaker Peso next year. We are closely monitoring the forward markets as they will show how quickly traders believe the rate gap will close. The Peso’s strong performance is a trend continuing from 2023 and 2024 when the rate difference often exceeded 600 basis points. As long as Banxico signals a slower pace of rate cuts than the market expects, holding short positions on USD/MXN futures remains a solid strategy. Create your live VT Markets account and start trading now.

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