The Mexican peso falls by more than 1% amid fears of the approval of the judicial reform

• Mexican peso tumbles as fears of congressional judicial reforms spark sell-off by foreign investors.
• Political tension is rising after President Lopez Obrador cut ties with the US Embassy over criticism of the reform.
• Commercial data overlooked; smaller than expected trade deficit, overshadowed by political focus.

The Mexican peso fell sharply on fears among foreign investors that the upcoming Mexican Congress could approve reform of the judicial system. However, a committee of deputies approved the ruling on the reform, which is expected to be voted on when the new Congress takes office on September 1. This sparked fears among investors who dumped the Mexican peso as USD/MXN trades at 19.64, posting gains of over 1.20%.

Mexico’s economic file revealed that the Trade Balance posted a deficit of -$0.072 billion, less than the -$1.35 billion expected by most analysts. However, analysts ignored this, keeping an eye on political developments in Mexico.

USD/MXN rose sharply after news revealed that Mexico President Andres Manuel Lopez Obrador said there is a “break” in their relationship with the US Embassy after the ambassador commented on proposed judicial reform.

On August 22, US Ambassador Ken Salazar said: “Based on my lifelong experience supporting the rule of law, I believe the direct election of judges poses a major risk to the functioning of democracy in Mexico. Any judicial reform must have safeguards to ensure that the judiciary is strengthened and not subject to political corruption.”

Canada’s ambassador to Mexico, Graeme C. Clark, echoed some of his comments during the Mexico-Canada business forum. Clark commented that the reform raised doubts about the stability of Mexico’s legal framework, which is essential to maintaining the confidence of foreign investors.

Across the border, the US economic file showed Conference Board (CB) consumer confidence for August, which was expected to deteriorate from 101.9 in July to 100.7, according to analysts. However, consumers became more optimistic about the US economy, with the index rising to 103.3.

That boosted the greenback against most emerging market currencies, even as Federal Reserve (Fed) Chairman Jerome Powell gave the green light last week to start cutting interest rates. This has hurt the greenback’s outlook against most G7 currencies, but the US dollar continues to gain momentum against the Mexican peso.

Daily Market Reasons: The Mexican peso also depreciates due to geopolitical risks

• Another factor putting pressure on the Peso was the escalation of the Israel-Hezbollah conflict in the Middle East.
• Traders will watch Fed speakers, the release of second-quarter 2024 US GDP and the Fed’s preferred inflation gauge, the Price Index for Personal Consumption Expenditures (PCE).
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 100 basis points (bps), according to the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso weakens as USD/MXN hits 19.70

The USD/MXN uptrend remains in place, with buyers gaining momentum as the exotic pair hit a two-week high of 19.70, a level last touched on August 5. The Relative Strength Index (RSI) suggests the bulls are in charge, meaning the pair could aim higher.

If USD/MXN breaks above 19.70, the next resistance would be the 20.00 figure, followed by the year-to-date (YTD) high at 20.22. Once released, further gains are seen following the 20.50 supply area.

Conversely, if USD/MXN breaks below 19.50, this could expose the 19.00 figure. A breach of the latter and further losses are expected, with the next support being the August 19 low of 18.59, followed by the 50-day Simple Moving Average (SMA) at 18.48.