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- Mexican Peso fluctuates in the face of political risk
Mexican Peso fluctuates in the face of political risk
- The Mexican Peso is trading flat as Mexican lawmakers debate a controversial constitutional reform bill.
- A vote on the reforms taking place on Wednesday could cause volatility for the Peso.
- USD/MXN pauses in its uptrend – more gains are expected from technical analysis.
The Mexican Peso (MXN) trades in a narrow range in its key pairs on Wednesday as the dust settles following the global market sell-off of previous sessions.
On Tuesday, US stocks experienced their largest declines since the market meltdown on August 5, after the release of weak US manufacturing data revived hard-landing concerns for the US economy.
Global chipmaker Nvidia’s shares dropped 9%, and the company saw $279 billion wiped off its market capitalization – the largest ever recorded in a single day – after fears Artificial Intelligence (AI) stocks had formed a market bubble.
One of the less-affected assets in Tuesday’s turmoil, the Peso is likely to be more influenced by domestic affairs. Lawmakers in Mexico’s lower house are currently debating controversial reforms to the judiciary before a vote scheduled for Wednesday.
If passed, the legislation will move to the upper house for voting. However, the news could weigh on the Mexican Peso. Critics say the reforms will stifle inward investment and could damage trade ties with the US and Canada.
Mexican Peso vulnerable to political turmoil
Mexican Peso fluctuates between tepid losses and gains as Mexico’s Morena-led parliament tries to push through a judicial reform bill on Wednesday.
The debate had to take place in a different location on Tuesday after the entrance to the Mexican Congress was blocked by Supreme Court workers protesting against the bill, according to El Financiero.
Over 1,000 workers in the judiciary, including several Supreme Court judges themselves, are striking against the controversial reforms, which would see judges elected by popular vote rather than appointment. Critics say the move will undermine the independence of the judiciary and democracy; supporters argue the reforms will help break the stranglehold of organized crime on the courts.
The bill is expected to pass smoothly through the lower house because the Morena-led coalition government has a two-thirds majority there. After that, it will pass to the upper house for voting, where the government is one seat short of a majority – however, experts still believe it will pass without much trouble.
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, has warned that although reforms are needed, the current bill is not the right way to implement them. 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.
Recent data showed that the Mexican Jobless Rate rose to 2.9% in July from 2.8% in the previous month, in line with expectations. On a seasonally adjusted basis, the Jobless Rate rose 2.7% in July, the same as the previous month, according to data from INEGI.
At the time of writing, one US Dollar (USD) buys 19.82 Mexican Pesos, EUR/MXN trades at 21.92, and GBP/MXN at 26.02.
Technical Analysis: USD/MXN rising in solid uptrend
USD/MXN pauses during its uptrend within a broader rising channel. On Tuesday, it broke briefly above the 19.96 high of the mini-range, making a higher high at 19.98, but the pair failed to build on the gains.
Given that “the trend is your friend”, however, the odds favor more upside eventually, taking the pair to new highs.
USD/MXN Daily Chart
A close above 19.98 (September 3 high) would further confirm a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.
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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