Mexican Peso Hits Two Month High as Crude Rises Above $35

Mexican Peso Hits Two Month High as Crude Rises Above $35
May 26, 2020


The Mexican peso strengthened to trade at around 22.5 against the USD, its highest level in over two months, as oil prices rose amid signs of a recovery in fuel demand as some countries continue to lift lockdown restrictions. The peso’s rally was also aided by the latest data showing Mexico’s inflation rising faster than expected in the first half of May, allowing a chance for the country’s central bank to consider trimming borrowing costs. The Central Bank of Mexico slashed its benchmark interest rate by 50 basis points to 5.5% on May 14th and signaled additional rate cuts in the months ahead.

Yesterday, Brent crude rose above $35 per barrel, against the backdrop of a rebound in fuel demand as numerous countries continue to lift restrictions related to lockdown. Indian Oil Minister has revealed that the nation has regained almost 65% of its earlier demand for fuel and anticipates demand to touch almost pre-pandemic levels by June. In the meanwhile, SPA, Saudi backed news agency, has reported that Iraq and Saudi have accepted to work towards bringing a balance in the oil market and emphasized their dedication to production cutbacks accepted by the OPEC+.

Mexico recorded a trade deficit of $3.807 billion in April, compared to a surplus of $1.370 billion in the same period last year and far below the market’s anticipations for a $2.04 million surplus. It was the biggest trade gap since January 2019, against the backdrop of the coronavirus crisis. Exports plummeted 40.9% y-o-y to more than a decade low of $23.385 billion, as sales of oil plummeted 66.4%, and those of non-oil declined 39.4%. On average, the country shipped 1.179 billion barrels of crude oil per day, greater than 1.023 million barrels last year, while the price was $14.18 per barrel, $47.68 below the price in April 2019. Non-oil exports to the US declined 40.7%, led by automotive (-80%) and other goods (-20.2%). Imports fell 30.5% to more than nine-year of $26.742 billion, mainly due to a decline in purchase of intermediate goods (-28.1%), capital (-26.7%), consumption (-46.5%) and oil (-53%).

Two weeks earlier, the Central Bank of Mexico trimmed its overnight interbank rate, as mentioned earlier in this article. Policymakers highlighted that inflation threats, sluggish economic activity, lack of stability in financial markets caused by the Covid-19 pandemic stood as the key challenge for monetary policy and economy in general. The Bank underlined that yearly headline inflation fell from 3.25% to 2.15% between March and April 2020, while the country’s economic activity shrank considerably in the first quarter of the year.

Mexico’s industrial production fell 5% y-o-y in March, following an upwardly amended 2% decline in the earlier month and compared with market forecasts of a 6.1% decrease. It was the biggest drop in industrial output since October 2010, in between business shutdowns and lockdowns due to the Covid-19 pandemic. Manufacturing production contracted deeper (-6.1% versus -1.2% in February) and utilities production declined 0.8%, after expanding 1.5% in the earlier month. Also mining output growth declined to 1.3% from 5.5% in February. On the contrary, construction production declined only slightly (-7.5% in March, compared with -9% in February). On a monthly basis, industrial output decreased 3.4%, following a 0.5% decline and compared to the Consensus estimate of a 4.4% decrease.

The weak economic data mixed with a recovery in the crude oil prices are expected to keep the Mexican peso range bound with bearish bias in the short-term.

MXN - technical analysis - 26th May 2020

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Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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