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Market Analysis

Fundamental Analysis: Oil Flat and a Pause for MXN’s Rally

February 20, 2019
BY Michael Stark

The Mexican peso’s big gains appear to be over for now with markets digesting the impact of the halt in WTI oil’s upward movement. Tomorrow afternoon’s release of the minutes from the Bank of Mexico (BdeM)’s latest monetary policy meeting is in full view for traders of MXN.

USDMXN has bounced slightly since last week to trade at around Mex$19.17 today. The picture is similar against the euro at about Mex$21.76 at the time of writing. Only against the yen among majors has MXN made some more gains to ¥5.77, near three-month highs.

Oil important in halting the peso’s rally

MXN’s upward movement since December was catalyzed primarily by rates. A degree of uncertainty surrounded the BdeM’s intentions, but its meeting on 20 December announced a hike in the benchmark rate to the 10-year record 8.25%. This in itself has spurred even higher demand for the peso as part of carry trades, particularly against currencies other than the dollar.

The central bank’s decision to raise its rate is based on a clear rationale. Recent data demonstrates that efforts like rate hikes to maintain the target of ‘low and stable’ inflation are succeeding. YoY inflation earlier this month decreased to 4.37%, the lowest since early 2017.

The technical situation of being overbought earlier this month is significant for the peso’s latest movements. However, oil is the key fundamental factor in MXN’s retreat in recent days. Even though the peso is not usually regarded as a commodity currency in the same way as the Canadian dollar or Norwegian krone, oil is central to Mexico’s economy. The country produces around 2.5 million barrels of crude every day, which is roughly 3% of the world’s total.

The stutter in WTI’s rally then is a significant negative fundamental for the peso. The North American benchmark for crude appears to have hit resistance around $56.50 as American supplies increase and Chinese growth remains lackluster.

What’s in store from the BdeM’s minutes?

The minutes from the Bank of Mexico’s latest policy meeting are due at 15.00 GMT tomorrow. While there is a large amount of different factors to be considered by traders, probably the most important of these are the risks noted by the BdeM in its last minutes:

  • Trade disputes
  • Tightening financial conditions
  • Local political and wider geopolitical risks
  • Volatility in the price of crude oil

Based on events this year so far, the first two factors are less significant. In this case, the most important comments would be on politics and the level of risk the central bank sees in this area. As usual, though, inflation is a key factor: the committee might not share the markets’ positivity here.

Peso’s direction uncertain this week, but a bounce is possible

There is a very high degree of unpredictability in tomorrow’s news and the price of oil. Despite this, the most likely movement by MXN for the rest of the week would be downward against most currencies unless there’s a major positive surprise tomorrow afternoon.

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