USD/MXN: Mexican Peso’s 90-day correlation with oil is strongest in four years

• The positive correlation between Mexico’s peso (MXN) and oil is strongest in four years. 
• With markets worried about global growth, the correlation is likely to remain strong in the near term.

USD/MXN’s 90-day correlation co-efficient with oil has declined to -0.93, the lowest level since February 2016. 

Essentially, the positive relationship between peso and oil is now at its strongest in four years. 

Correlation does not mean causation. However, that argument does not hold ground in this case, as  Mexico’s vast oil reserves provide collateral for financing. Peso, therefore, tends to move in line with oil prices. 

The correlation has strengthened recently, as the coronavirus outbreak in the first quarter triggered recession fears, sending oil lower by 67 percent. The peso also tanked by 25 percent in the January to March period. 

At press time, USD/MXN is trading at 24.04 and a barrel of West Texas Intermediate crude is changing hands at $25.90. 

Focus on OPEC+ meeting

OPEC+, a loose group of 24 oil-producing nations led by Saudi Arabia and Russia, are scheduled to meet on Thursday to discuss output cuts to rebalance markets and support oil prices. 

Most industry experts including analysts at Goldman Sachs and Darren Woods, CEO of Exxon Mobile, are of the opinion that the demand side has weakened significantly due to the virus-induced slowdown in the global economy and output cuts may fall short of rebalancing the market. 

Hence, price rallies, if any, on potential output cuts deals could be short-lived, more so, as a V-shaped economic recovery is increasingly looking unlikely. 

Technical levels