Mexican Peso tumbles as Mexican congress votes for controversial reforms
|- The Mexican Peso weakens after the Mexican lower house votes through a set of controversial reforms.
- Investors are concerned about the negative impact of the reforms on the economy.
- USD/MXN restarts its uptrend after a pause and breaks above 20.00.
The Mexican Peso (MXN) depreciates in its most-traded pairs on the day named after the Norse god of thunder, extending the over-one-percent decline clocked up on Wednesday.
The Peso is being sold because investors are fretting about the Mexican parliament passing a controversial bill of reforms that critics say will compromise the independence of the judiciary, undermine democracy and damage international trade and foreign investment.
Mexican Peso depreciates after Mexican congress passes reforms
The Mexican Peso weakened in its key pairs on Wednesday after lawmakers in Mexico’s lower house voted through a controversial bill of reforms to the judiciary.
The reforms seek to counter the perceived corruption in the judiciary by electing judges through popular vote, rather than by appointment. However, critics argue the bill will compromise the independence of judges and fail to combat corruption, which is more located amongst lower-ranking officials and members of law enforcement agencies.
Despite protests and strikes from court employees against the reforms, who blocked the entrance to congress on Wednesday – forcing lawmakers to relocate to a sports hall for the debate and subsequent vote – the government managed to get the bill passed, winning a vote of 357 in favor versus 130 against.
The reforms will now be debated in Mexico’s upper house, where the government is one seat short of a majority. Most experts believe, however, that it will still get voted through.
From a financial perspective, the reforms run the risk of leading to a decline in foreign investment. This, in turn, would reduce demand for the Peso, leading to a further depreciation of the currency.
The US ambassador for Mexico, Ken Salazar, said that although reforms to the judiciary were needed the current bill was raising concerns among investors in his country. He warned it could jeopardize the two countries’ close relationship, which includes a free trade deal.
“If it is not done in the right way, it could cause a lot of damage to the relationship,” said Salazar at a press conference on Tuesday.
At the time of writing, one US Dollar (USD) buys 19.99 Mexican Pesos, EUR/MXN trades at 22.18, and GBP/MXN at 26.30.
Technical Analysis: USD/MXN breaks above 20.00
USD/MXN restarts its uptrend, climbing within a broader rising channel. Given that, according to technical analysis, “the trend is your friend” the odds favor more upside.
On Tuesday, the pair broke briefly above the 19.96 high of the mini-range, making a higher high at 19.98 – on Thursday it breaks above that and touches 20.00.
USD/MXN Daily Chart
This supplies further confirmation of a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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