Mexican Peso tanks to eight-month low amid AMLO’s comments, US data

• 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 18.35, gaining some 2.0% after hitting a multi-month high of 18.39.

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.