USD/MXN wavers as crude oil price pare earlier gains

The USD/MXN pair rose slightly as the market reacted to an announcement by Saudi Arabia on oil supplies. The pair is trading at 21.6325, which is higher than the intraday low of 21.4770.

Saudi Arabia roils oil market

Mexico is one of the biggest oil-producing countries in the world. According to Worldometer, the country produces more than 2.6 million barrels of oil every day. It exports half of the oil it produces, meaning that the commodity is a major source of foreign currency.

As all crude oil currencies, the Mexican peso declined sharply early this year, when the price of oil declined. But the value of the peso has been on a sharp trend in recent weeks as the price of oil has soared by more than 50%. A weaker dollar and the reopening of the economy have also helped the peso, which has gained by about 10% in the past month.

The USD/MXN declined sharply earlier today as investors reacted to the supply cut deal that was reached on Saturday. In the agreement, OPEC members and their allies agreed to cut production by 9.6 million barrels in July, continuing the cuts that started in May. In the previous agreement, the members were supposed to start slashing production by 7.7 million from July.

The deal came a day after Saudi Arabia and Russia convinced Iraq, Nigeria, Angola, and Kazakhstan to comply with the deal. This is after it emerged that the four countries were cheating on their commitments.

In a statement today, Saudi said that it will end its voluntary extra oil production cuts at the end of the month. According to Bloomberg, the extra cuts amounted to about 1.2 million barrels a day. This announcement led the price of oil to drop by more than 2%.

The price of oil gained earlier on because Saudi and Abu Dhabi raised oil prices for the first time in months.

Risks for crude oil prices

Analysts fear two things. First, they are afraid that the soaring oil prices will incentivise American shale producers to come back to the market. In recent weeks, these producers have been slashing their output at the fastest pace ever. According to Baker Hughes, oil rigs in the US declined by 17 to 284. That was a 691 decline from the previous year.

Second, they believe that it will be difficult for some countries to comply with the agreements. For example, they expect Iraqi leaders to face opposition back home about cutting supplies at a time when the country is rebuilding after decades of war and sanctions. Also, it is not the first time that Iraq and Nigeria have cheated on oil supplies.

Mexican peso joins global rally

The USD/MXN has also dropped because of the overall dollar weakness. In the past month, the dollar index has declined by more than 3% as demand for the currency weaken at a time when the Fed is printing trillions of dollars. Other emerging market currencies like the South African rand, Russian rouble, and Turkish lira have also been dropping.

This action is happening at a time when these countries are expected to have their deepest recession. According to the World Bank, economic activity in Latin America and the Caribbean will drop by 7.2% this year, the worst performance in decades. This decline will be worse than the global average of 5.2%.

Meanwhile, hedge funds and other speculators have increased their bullish exposure to the peso. According to the CFTC, net long positions were 8.3k in the previous week, an increase of 3.6k.

USD/MXN technical outlook

On the daily chart, the USD/MXN has been on a sharp decline since peaking at 25.7777 on April 6. The price is slightly below the 50% Fibonacci retracement level and is also below the 50-day and 100-day EMA. The RSI has dropped to the oversold level of 30. This means that the price may continue declining since the price is not yet extremely oversold. As a result, bears will next target 21.00, which is an important psychological level.