CRUDE OIL, MEXICAN PESO OUTLOOK

• Crude oil prices approaching $75, the lowest since July
• Banxico pivots to a less aggressive monetary policy stance
• Key levels to watch on MXN/JPY

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WTI crude oil prices are on the cusp of dipping below $75, marking the lowest point since July on a closing basis. This downward trend is fueled by speculations surrounding a slowdown in the economies of major oil-consuming nations. Factors contributing to this decline include a surge in crude oil inventories in the United States and comments from Federal Reserve Chair Powell hinting at the potential for further monetary tightening, adding to the pressure in the energy sector.

Hedge funds and speculators operating in the futures market are actively unwinding their long positions in crude oi in response to recent price action dynamics. Despite this, the persistently high level of long positions compared to pre-summer levels suggests the potential for additional reduction in bullish bets, which could exacerbate downward momentum.

WTI Crude Oil Futures Positioning (Speculators)

CRUDE OIL PRICE OUTLOOK

WTI crude oil prices have broken through support at $80 per barrel and are currently hovering around the $75 mark. From a technical standpoint, the Relative Strength Index (RSI) has fallen below 50 and appears oversold, but remains above the 30.00 threshold, indicating some room for further weakness. The occurrence of a "death cross," where the 9-day moving average moves below the 200-day moving average, adds another bearish cue to the mix.

With these negative signals on the technical front and hedge fund positioning a potential headwind, there's a possibility that WTI crude oil prices may deepen their losses, descending below $75. This could set the stage for a decline towards the 78.6% Fibonacci retracement level at $73.06, based on the observed price movements from June 28 to September 28.

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WTI CRUDE OIL PRICE DAILY CHART

Source: TradingView

BANXICO MONETARY POLICY MEETING

The movement of crude oil prices is crucial for the Mexican Peso, as oil is a major commodity for Mexico. Adding to the equation is Banxico's latest monetary policy announcement.

For context, policymakers kept borrowing costs at a record high, but hinted at a potential cut in the post-meeting statement, resulting in some weakening of the currency against major counterparts.

This tweak in guidance contrasts with Banxico's previous assurance of no immediate plans for easing, marking a noteworthy shift in the central bank's stance. Following the latest decision, financial markets have adjusted their expectations, factoring in an increased likelihood of a rate cut within the next six months.

MXN/JPY TECHNICAL OUTLOOK

MXN/JPY has breached the 38.2% Fibonacci retracement at 8.509 yen, based on price movements from July 13 to August 28, transitioning into a trend of a stronger Mexican Peso and weaker Japanese Yen. While the RSI has crossed above 50, indicating overbought conditions for MXN, it has fallen below 70, suggesting further room for MXN strength and JPY weakness.

Focusing on the near-term price outlook, in case of MXN/JPY strength, attention should be directed towards resistance at 8.698 (September 20 high). A successful breach of this barrier may reinforce upside pressure, opening the door for a move towards the yearly high at 8.777.

Conversely, in the event of an MXN/JPY weakness, focus should be on whether the Fibonacci 38.2% level at 8.509 holds. If taken out, the MXN/JPY may slide towards Fibonacci support at 8.343.

MXN/JPY CHART

Source: TradingView

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