Mexico’s core inflation rose by 0.18% in the first half of April. This was below the 0.2% expectation.
The data points to slightly slower price growth than forecast over the period. The release covers the first half-month reading for April.
With core inflation coming in softer than anticipated, we see this as a clear signal that the Bank of Mexico (Banxico) may have more room to cut interest rates. This data point weakens the argument for keeping the policy rate at the current 10.50% level to fight inflation. This unexpected drop suggests that price pressures are easing faster than previously thought.
The Mexican peso, which has been strong due to the profitable carry trade, is now vulnerable. We saw the USD/MXN exchange rate, which was stable around 16.50, immediately show signs of volatility on this news. Traders should anticipate downward pressure on the peso as a lower interest rate differential makes holding the currency less attractive.
Looking at the derivatives market, the overnight interest rate swaps now indicate a 60% probability of a 25-basis-point cut at Banxico’s next meeting on May 15th. This is a significant jump from the 35% chance that was priced in just yesterday. This sentiment shift shows how quickly the market is reacting to the possibility of looser monetary policy.
We must remember the pattern from back in 2024 and 2025, when Banxico often acted with more caution than the market expected after a single soft inflation report. The central bank remains committed to its long-term inflation target of 3%, and a single data point might not be enough to trigger an immediate and aggressive cutting cycle. This historical precedent suggests that betting everything on a rate cut could be risky.
Given this outlook, one strategy for the coming weeks is to use options to play the expected increase in currency volatility. Buying USD/MXN call options with an expiration after the mid-May meeting could be a direct way to position for a weaker peso if the bank does cut rates. Alternatively, a strangle could be used to profit from a large move in either direction, covering the possibility of a surprise hold from the central bank.
