USD/MXN: 2 reasons why Mexican peso is in a strong rally
- The USD/MXN pair has dropped sharply this month.
- This is because investors hope that US-Mexican relationship will normalise in Biden administration.
- The Mexican peso has also risen because of higher crude oil prices.
The USD/MXN pair had declined by more than 5% this month as traders focus on the relationship between the United States and Mexico. It is trading at 20.2953, which is slightly higher than this week’s low of 20.0365.
US and Mexico relationship under Biden
The US and Mexico have one of the biggest trade relationships in the world. Every year, the two countries do trade worth more than $677 billion. US exports goods worth more than $277 billion while Mexico sells goods worth more than $289 billion.
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The two countries share a long border and are also members of the United States, Mexico, and Canada Agreement (USMCA) that replaced NAFTA. This agreement is mostly responsible for this volume of trade.
The Mexican peso is rallying this week because analysts hope that the relationship between the two countries will improve in the Biden administration. That is primarily because the relationship was not cordial during the Trump administration.
The main cause of conflict was the large trade deficit the US had with Mexico. Another reason was that the Trump administration accused Mexico of not doing enough to curb illegal migration. At one point, President Trump threatened Mexico with tariffs because of the migration issue.
Biden, the president-elect, is relatively different from Trump. For one, he does not view trade based on the deficit and surplus. Also, his approach towards migration is different from Trump. As such, most people expect that the two countries will have a better relationship, which will be a good thing for the Mexican economy.
Higher Crude oil price
The USD/MXN is also falling because of higher crude oil prices. That is because Mexico is a major exporter of crude oil. As such, higher oil prices tend to improve the Mexican economy and push the Mexican peso higher.
The price of crude oil has been on an upward trend this month with the West Texas Intermediate (WTI) and Brent rising by more than 12%.
This trend is mostly because analysts expect that oil demand will return as the world gets vaccinated. Earlier this week, Pfizer and BioNTech said that their vaccine was 90% efficient, which means that it will start being distributed in the next few months.
The price is also rising because of the falling US inventories. According to the American Petroleum Institute (API), inventories dropped by more than 5.1 million barrels last week. That was higher than the 900k decline that analysts were expecting. It was also the second consecutive month that inventories have fallen.
USD/MXN technical outlook
On the daily chart, we see that the USD/MXN pair has been in a steady downward trend after peaking at 25.71 in March this year. The price is below the lower side of the descending channel that is shown in pink. It is also below the 25-day and 15-day exponential moving averages and the 61.8% Fibonacci retracement level. Therefore, the pair will continue falling as bears aim for moves below 20.00. Start your trading journey with our comprehensive free forex courses and forex broker reviews.