Mexican Peso collapses as President AMLO insists on controversial reforms
|Most recent article: Mexican Peso bottoms out after depreciating 8.0% last week
- Mexican Peso collapsed to 18.40 against USD after AMLO's remarks on judicial and transparency reforms.
- AMLO’s comments on judicial reform and dissolution of autonomous bodies spur investor concerns.
- Mexico’s headline inflation rises for third month, while core inflation declines for 16th consecutive month.
- Strong US employment data boosts speculation of prolonged higher Fed rates.
The Mexican Peso sank to a new eight-month low against the Greenback on Friday after Mexican President Andres Manuel Lopez Obrador's (AMLO) comments rattled investors who continued to sell Pesos amid an uncertain outlook. The USD/MXN trades at 18.39, gaining some 2.30% in the day, and set for weekly gains of 8.30%.
In his usual morning press conference, Mexican President AMLO insisted on presenting a judicial reform and another that involves the dissolution of autonomous bodies, like the INAI, the government’s transparency body.
AMLO emphasized his radical rhetoric and stated, “The judicial power is hijacked, the service is taken over by a minority of those at the top. I have already said it here, and they know it very well. It is even shameful, but there are ministers who are like employees of large corporations,” according to El Financiero.
Consequently, the USD/MXN jumped from around 17.95 toward the multi-month high of 18.39 on AMLO’s remarks. Traders should be aware that the Mexican Peso will be extremely sensitive and volatile amid political uncertainty.
Aside from political comments, Mexico’s headline inflation rose for the third straight month, exerting pressure on the Bank of Mexico (Banxico). Nevertheless, underlying inflation, which excludes volatile items and provides a clear view of prices, dropped for the sixteenth consecutive month.
Across the border, the latest US employment report fueled speculation that the Federal Reserve (Fed) would keep rates “higher for longer,” with figures crushing estimates.
Following the data, US Treasury bond yields jumped more than ten basis points (bps), with the 10-year benchmark note rising to 4.414%, up 12.5 bps, and underpinning the Greenback. The US Dollar Index (DXY), which tracks the performance of the American currency against six others, rose 0.74% to 104.86.
Data-wise, Mexican Auto Exports increased in May but less than in April, signaling the economy is feeling the impact of higher borrowing costs set by Banxico.
Daily digest market movers: Mexican Peso landslide continues on investors’ fears
- On Thursday, Morena’s leader at the Congress, Ignacio Mier, commented that they will submit the proposals to the newly established Congress in September.
- Some of the most important proposals include a reform of the Supreme Court, which proposes that the Supreme Court's ministers be elected by popular vote; electoral reform, which seeks to have INE councilors elected by popular vote and reduce multi-membership; and reform of autonomous bodies, which entails the dissolution of INAI, the transparency body.
- Mexico’s Consumer Price Index (CPI) in May was 4.69% YoY, up from 4.65% in April, while core CPI dipped from 4.37% to 4.21%.
- Although this fuels speculations of another Banxico rate cut in June, a further depreciation of the Mexican Peso could prevent the Mexican Central Bank from easing policy.
- Morgan Stanley noted that if Mexico’s upcoming government and Congress adopted an unorthodox agenda, it would undermine Mexican institutions and be bearish for the Mexican Peso, which could weaken to 19.20.
- US Bureau of Labor Statistics (BLS) revealed that May’s Nonfarm Payrolls increased by 272,000, exceeding forecasts of 185,000 and April’s 165,000.
- US Unemployment Rate jumped from 3.9% to 4%, while Average Hourly Earnings (AHE) rose by 4.1% YoY, up from 4%.
- Contrary to Thursday’s expectations that the Fed might cut rates by 39 bps toward the end of the year. However, the latest US jobs report witnessed a fall to just 29 bps of easing, according to the December 2024 CBOT fed funds future rate contract.
Technical analysis: Mexican Peso depreciates sharply as USD/MXN surges above 18.20
From a technical standpoint, the USD/MXN remains bullish and might extend its gains if the pair achieves a fifth daily close above a four-year-old downslope resistance trendline drawn from all-time highs (ATH) at around $25.77, which was broken on Monday. That could be the last nail in the coffin for the Mexican Peso's strength.
The USD/MXN's next resistance would be the October 6 high of 18.48, which could open the door to challenging the psychological 19.00 figure. Once that level is breached, on March 20, 2023, a high of 19.23 would follow. If all those levels are surpassed, the exotic pair could hit 20.00, and reach a new 18-month high.
On the other hand, sellers need to push the USD/MXN back below the April 19 high of 18.15 if they would like to keep the pair within the 18.00-18.15 trading range.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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