USD/MXN: Mexican peso slides ahead of Banxico interest rate decision

The USD/MXN pair rose sharply as traders reacted to the falling crude oil prices. The Mexican peso also declined ahead of the Banxico interest rate decision. The pair is trading at 22.8155, which is higher than this month’s low of 21.4742.

Mexican peso reacts to falling crude oil prices

Mexico is a major oil producing country, exporting more than 1.2 million barrels every day. As a result, the country’s currency tends to react to trends in the crude oil market.

After weeks of gains, the price of crude oil has dropped sharply in the past two days as traders react to the growing coronavirus risks. According to health officials, the United States reported more than 38,000 new infections yesterday. That was the highest daily increase on record and the number is rising in most states. The same trend is happening in other countries like South Africa and Brazil.

As a result, analysts fear that these cases will lead to more stay-at-home orders at a time when the world is attempting to recover. Also, there is a risk that global travel will take a longer period than expected to restart. For example, European Union and Chinese officials have warned that they will not allow American flights when they reopen.

The risk is that demand for crude oil will take longer to recover. Indeed, the price of Brent and West Texas Intermediate (WTI) dropped by more than 3% in overnight trading.

The price also reacted to rising inventories in the United States. Data from the American Petroleum Institute (API) showed that stocks rose by more than 1.7 million barrels. Another number from the Energy Information Administration showed that the inventories rose by more than 1.45 million barrels.

As a result, crude oil currencieshave declined sharply in the past two days. The USD/MXN, USD/NOK, and USD/CAD are up by 0.23%, 0.25%, and 0.05%, respectively.

USD/MXN gains ahead of Banxico decision

The USD/MXN is also reacting to the upcoming interest rate decision from Mexico. Analysts expect that the country’s central bank will lower interest rate by 50 basis points to 5.0%. This will be the lowest interest rate since 2016 and the third rate cut this year.

The Mexican central bank has surprised investors this year. As shown below, the bank has been the most hawkish in Latin America. The chart shows that the interest rate is slightly above the 10-year average.

In a statement, analysts at ING said:

“Banxico’s policy stance can be hardly justified by Mexico’s economic cycle prospects, given the grim outlook for economic activity and the relatively benign inflation trends. As a result, it reflects, presumably, an effort to support the stability of domestic financial markets, especially the Mexican peso. “

This decision comes at a time when the economic outlook is weakening because of the falling oil prices and rising infections in the United States. As a result, analysts at ING expect the bank to slash rates to about 4% by August.

USD/MXN technical outlook

The daily chart below shows that the USD/MXN pair rose sharply as the price of crude oil declined between February and March. The pair moved from a YTD low of 18.5420 to a high of 25.7850. The direction changed in the past few weeks as the price of crude oil jumped. It is now trading at 22.8435, which is the highest it has been since June 12.

The price is now above the 50-day and 100-day exponential moving average and slightly below the 38.2% Fibonacci Retracement level. A move above the June 12 high of 22.9560 will mean that there are more buyers in the market. As such, this will see the USD/MXN rise as bulls attempt to move above 23.00.

On the flip side, a move below 22.2800 will invalidate this prediction. This price is along the 100-day EMA.