- 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) falls 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.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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