Mexico Second Quarter GDP Misses Expectations, USD/MXN Shrugs Off Data

MEXICO GDP KEY POINTS:

• Mexico’s second quarter GDP grows 1.5% q/q and 19.7% y/y, slightly below market expectations
• Economic expansion was driven by labor-intensive tertiary/services sector
• Progress in the recovery could allow Banxico to raise rates again in the coming months, but tightening plans will depend on how the pandemic evolves

Most read: US Dollar Looking for a Lifeline in PCE Inflation Data

The Mexican economy expanded at a dynamic pace in the April-June period, as the country continued to recover from the crisis induced by the coronavirus pandemic. According to the National Institute of Statistics, Geography and Informatics (INEGI), gross domestic product in the second quarter grew by 1.5% in seasonally adjusted terms (q/q) and by 19.7% compared to a year earlier (y/y), bolstered by the labor-intensive tertiary/services sectors. Economists had expected a 1.8% quarter-over-quarter and 19.8% year-over-year print. While the annual figure is consistent with a strong rebound in domestic demand, it is important to note that base effects are responsible for the robust increase.

Source: DailyFX Economic Calendar

Although data came slightly below expectations, there is no doubt the economy continues to heal. This may allow Banxico to continue raising borrowing costs in the second half of the year to contain mounting inflationary pressures. Traders currently expect about 100 basis points of tightening for the rest of 2021, with ~20bps rate increase priced for the August 12 meeting. However, tightening plans could unravel quickly if the new wave of COVID-19 dents confidence and weakens the recovery. That said, if the health crisis intensifies amid a surge in coronavirus cases, Banxico could remain on hold for the next few months until the pandemic subsides with the help of increased vaccination levels. For this reason, traders should closely monitor developments on the pandemic front in the coming weeks and whether new outbreaks lead to mobility restrictions.

Back to today’s data, the results did not trigger any major moves in the USD/MXN exchange rate. In fact, at the time of this writing, the pair is trading near the flatline around 19.85. However, price could charge higher after the NY opening bell if risk aversion climbs amid U.S. equity weakness. At the time of this writing, future contracts on the Nasdaq Index point to large drop, dragged by significant drop in Amazon’s shares after hours following its disappointing quarterly earnings results.

USD/MXN 5 MINUTE CHART

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—Written by Diego Colman, DailyFX Market Strategist