Mexican Peso falls over 4% after landslide victory for left

• The Mexican Peso pauses after plummeting over 4% in key pairs on Monday. 
• The possibility of the left-leaning Morena party winning a supermajority sparks fears among investors. 
• USD/MXN breaks above a key long-term trendline, transforming the technical picture for the pair.
   

The Mexican Peso (MXN) is resuming its downtrend after a brief pause on Tuesday following an over 4% decline in its key pairs on Monday. The Peso went into freefall after early indications showed President-elect Claudia Sheinbaum and her Morena party were heading for a landslide victory in the Mexican presidential and congressional elections held on Sunday.  

USD/MXN is exchanging hands at 17.87 at the time of writing, EUR/MXN is trading at 19.47 and GBP/MXN at 22.86. 

Mexican Peso weakens on fears of a Morena party supermajority 

The Mexican Peso plummeted on Monday after a quick count by the National Electoral Institute showed Claudia Sheinbaum leading with at least 59% of the vote in the presidential elections, and her Morena party poised to possibly clinch super majorities in both houses of the Mexican legislature, according to Aljazeera News. The official results will be published after the votes are counted between June 5-8. 

The Mexican Peso weakened significantly after investors became nervous Sheinbaum’s Morena party could win super majorities – defined as a majority of two thirds – in both the Congress and the Senate. This would enable them to enact proposed reforms to the Mexican constitution, such as the election of the judiciary by popular vote and the preferential treatment of state-owned energy companies over  private corporations. Critics argue such changes could be anti-democratic and market unfriendly. 

According to estimates by Bloomberg Economics, Morena will probably win a super majority in Congress but fall four-seats short of one in the Senate. 

“Although that doesn’t immediately allow Sheinbaum to make changes to the constitution that have eluded [current President] Andres Manuel Lopez Obrador, it leaves her in the position to negotiate with just a few senators to pass key reforms,” said Bloomberg News’ Economy and Government reporter Alex Vasquez. 

Yet not all of Sheinbaum’s policies will necessarily hurt the Mexican Peso. Her pledge to increase the minimum wage by around 11%, better welfare benefits and government-led investment could increase consumer spending and economic growth, forcing the Banco de México (Banxico) to maintain high interest rates, according to Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics. 

Since relatively high interest rates attract more foreign capital inflows, the Peso could remain well-supported despite investor fears.

Technical Analysis: USD/MXN breaks decisively above major trendline

USD/MXN – or the number of Pesos that can be bought with one US Dollar – breaks above a long-term trendline, marking a major shift in the outlook for the pair and probably reversing the intermediate-term downtrend to an uptrend. 

With both the short and intermediate trends bullish, the odds favor more upside over those time frames (up to six months). 

USD/MXN 4-hour Chart 

Further upside could see USD/MXN reach the April highs at around 17.92, followed by resistance at 18.12 (100-week Simple Moving Average) and then 18.49 (October 2023 high). 

The long-term trend is probably still bearish, however, suggesting a risk of a reversal lower if the uptrend runs out of steam. There are no signs of that happening yet from price action, however, which remains resolutely bullish.