USD/MXN: Mexican peso falls as G20 leaders deliberate oil prices

The USD/MXN pair fell by 50 basis points as G20 ministers met to deliberate on oil supply cuts. The virtual meeting happens a day after Russia, and OPEC members agreed to cut production by 10 million barrels a day. This represents about 10% of the global supply.

Mexican peso gains as G20 meets

Mexico a stumbling block

Yesterday’s meeting happened after weeks of a tussle between OPEC members and Russia. The two sides have struggled on how to deal with the changing dynamics in the oil market. Demand has fallen due to coronavirus while non-OPEC members like the US and Canada have benefited from relatively stable prices.

In their March gathering, Saudi Arabia proposed more supply cuts and extending the expiry of their March deadline. Putin’s representative argued that other oil producers were taking advantage of the cuts to boost their market share. In return, Saudi opened its taps and reduced the price of its oil, leading to a 50% decline in oil prices.

In yesterday’s meeting, Saudi Arabia and Russia agreed to cut 5 million barrels with other OPEC+ members agreeing to cut the remaining 5 million barrels.

Mexico, which joined OPEC+ in 2016, rejected its allocated cuts of 400k barrels. Instead, the minister said that the country was only able to reduce production by just 100k barrels a day. This decision risks crumbling the world’s biggest oil deal and is partly blamed for the weak performance of crude oil today.

G20 ministers are meeting today to deliberate on the state of oil industry. There are hopes that other non-OPEC members like Norway, Canada, and the US will commit to slash production too.

Mexico economy hurting

The Mexican economy has been in trouble. In June last year, Fitch downgraded the country’s sovereign debt rating, citing the ongoing challenges with Pemex. The coronavirus pandemic worsened the economy, leading to a downgrade by S&P Global Ratings. Fitch also downgraded Pemex’s IDR’s to BB from BB+.

It’s easy to see why. The pandemic has hurt many countries, including the United States, which is its biggest trading partner. As a result, the demand for most products that the US buys has withered, leading to challenges in the economy. Last week, data from Markit showed that the manufacturing PMI dropped to 47.9, its lowest level since December. Recent data has also shown a contraction in industrial production, inflation, and fixed asset investment. As a result, the USD/MXN has risen by more than 23% this year.

USD/MXN YTD performance

The weakness of the economy is partly the reason why Mexico is resisting plans to slash production. This matters because Mexico is the 12^th leading oil producer in the world. It produces more than 2 million barrels a day and exports 50% of it.

USD/MXN technical outlook

The four-hour chart shows that the USD/MXN pair has dropped from the YTD high of 25.7771. The pair has moved slightly below the 100-day exponential moving average and has already passed the 23.6% Fibonacci Retracement level. The likely scenario is where the pair retraces to the 38.2% level of around 23.000. This level is also where it made a swing low on March 27.