USD/MXN: peso rally fades as low oil price converges with weak retail sales data

USD/MXN: peso rally fades as low oil price converges with weak retail sales data
Written by:
Crispus Nyaga
May 22, 2020
  • The USD/MXN pair rose today as investors reacted to plunging crude oil prices.
  • Data from Mexico showed that retail sales contracted in March while inflation slowed in May.
  • Other oil currencies like the Canadian dollar and Mexican peso have also weakened.

The USD/MXN pair rose by more than 40 basis points as investors reacted to the falling crude oil prices and the weak retail sales.

Mexican peso
USD/MXN rises as crude oil and retail sales disappoint

USD/MXN rises as crude oil price slides

Mexico is one of the biggest crude oil producers in the world. The country produces more than 2.4 million barrels of oil every day, making it the 17th biggest oil producers in the world. Most of this oil – about 1.23 million barrels – is exported, bringing the valuable foreign exchange to the country. The energy sector also employs thousands of people in Mexico.

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Therefore, there is a close correlation between oil prices and the Mexican peso. The Mexican peso has declined by more than 22 per cent against the dollar this year. This is partly because of the double-digit decline in the price of oil.

Today, the USD/MXN pair rose by more than 0.40% as the price of oil plunged. Analysts attribute the decline to the ongoing tensions between the United States and China. The decision by China to remove the GDP target also contributed to the plunge.

Analysts believe that the Chinese economy will contract faster than expected as the country abandons or slows down its investments in infrastructure. Similarly, the new conflict with the United States will affect demand because it will affect economic growth.

Other oil currencies like the Canadian dollar, Mexican peso, and Russian ruble also weakened today.

Mexican peso slides after weak retail sales data

The USD/MXN pair also rose because of the weak Mexican retail sales data. Data from the statistics office showed that the headline retail sales dropped by 0.8 per cent in March. The sales plunged by 1.3 per cent year on year after expanding by 2.5 per cent in the previous month. According to the office, that was the worst performance since February 2019. Worse, the data do not include April, when the country implemented a lockdown.

Mexico is not the only country where retail sales have dropped. According to the Office of National Statistics (ONS), retail sales in the UK dropped by an unprecedented May. The same trend has happened in Japan and Europe.

Mexico is also suffering from low inflation. According to INEGI, the consumer price index rose by just 0.30% in the first week of February. The core CPI rose by 0.30%. The department attributed the inflation data to higher merchandise prices, which rose by 0.36% while services prices rose by 0.12%. Further, the prices of agricultural products rose by 2.3% while those of energy fell by 1.20%.

USD/MXN technical outlook

USD/MXN technical forecast

The USD/MZN is trading at 22.9387, which is lower than the YTD high of 25.7585. On the daily chart, the pair has been on a steady decline in the past four days as investors cheered higher oil prices. The price has also passed the 50-day EMA, but it remains above the 100-day EMA.

Also, the price is along the 38.2% Fibonacci retracement level. Therefore, the downward trend will remain as long as the price moves below the 38% Fib level of 23.000. On the other hand, a move above the 23.6% retracement of 24.00 will invalidate this trend.