Banco de Mexico, or Banxico, has lowered interest rates by 25 basis points to 7.25%. This decision came from a 4-1 vote, with Deputy Governor Jonathan Heath supporting a hold at 7.50%. The Governing Board’s statement hints at possible future rate cuts as they monitor inflation. They suggest that rates might pause due to inflation concerns, which could hit a target of 3% by the third quarter of 2026. Following this announcement, the USD/MXN rate slightly decreased, with future movements depending on technical analyses.

Banxico’s Mandate

Banxico’s main goal is to keep inflation low and stable at 3%. Interest rates play a vital role in their policy to manage the economy. Higher rates help control inflation by making borrowing harder, which strengthens the Mexican Peso. In contrast, lower rates usually weaken the currency. Banxico meets eight times a year to review its policies, and their decisions are often influenced by the US Federal Reserve. They typically meet a week after the Fed but sometimes take action beforehand to stabilize the Peso and maintain economic stability, especially after events like Covid-19. With Banco de Mexico’s interest rate now at 7.25%, the key point is the disagreement in the 4-1 vote and the new cautious tone. This suggests a potential pause in rate cuts, which could support the Mexican Peso. The MXN has already shown slight strength against the dollar following the announcement. Banxico’s new forecast indicates that inflation may only reach the 3% target by Q3 2026. Recent data shows October 2025 inflation in Mexico at a stubborn 4.1%, remaining above the bank’s acceptable range. This ongoing high inflation makes further rate cuts less likely soon.

Strategies for Traders

For derivative traders, the interest rate difference between Mexico and the United States is key. With the US Federal Reserve keeping its rate steady at 5.00%, the 225-basis point spread makes the peso appealing for carry trades. This situation should provide a solid base for the MXN despite Banxico’s recent cut. Banxico has a history of raising rates proactively, beginning in 2021, ahead of the Fed to safeguard the peso. This suggests a commitment to currency stability, with a reluctance to make rapid cuts that could weaken the MXN, especially as the Fed remains steady. Their past actions indicate a strong preference for a robust and stable currency. With this outlook for a stable or stronger peso, we recommend selling out-of-the-money call options on the USD/MXN pair. This strategy can profit from price stability or a decline in the pair, given the expectation that a significant rise above 19.00 is unlikely in the next few weeks. High interest rates also mean that option premiums will likely stay attractive for sellers. It’s important to monitor technical levels closely for signs of this trend. A drop below the 18.46/48 range would indicate further strength for the peso, possibly targeting the yearly low of 18.19. Conversely, if the price stays above 18.60, it could challenge our view, suggesting that peso weakness might return. Create your live VT Markets account and start trading now.

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