The 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 on Wednesday could cause volatility for the peso.
• USD/MXN pauses in uptrend – more gains expected from technical analysis.

The Mexican peso (MXN) is trading in a tight range across its key pairs on Wednesday as the dust settles from the previous sessions global market sell-off.

On Tuesday, U.S. stocks posted their biggest declines since the August 5 market collapse after the release of weak U.S. manufacturing data revived tough concerns about the U.S. economy.

Shares in global chipmaker Nvidia fell 9 percent as the company saw $279 billion wiped off its market capitalization — the biggest ever in a single day — after fears that artificial intelligence (AI) stocks had formed a market bubble.

One of the assets less affected 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 ahead of a vote scheduled for Wednesday.

If passed, the legislation will move to the upper house for a vote. However, the news could weigh on the Mexican peso. Critics say the reforms will stifle investment and could hurt trade relations with the US and Canada.

Mexican peso vulnerable to political unrest

The Mexican peso fluctuates between losses and tepid gains as Mexico’s Morena-led parliament tries to push through a judicial reform bill on Wednesday.

The debate had to be held at a different location on Tuesday after the entrance to the Mexican Congress was blocked by Supreme Court workers protesting the bill, according to El Financiero.

More than 1,000 judicial workers, including several Supreme Court judges themselves, are striking against the controversial reforms, which would see judges elected by popular vote rather than appointed. Critics say the move will undermine the independence of the judiciary and democracy; supporters say the reforms will help break organized crime’s grip on the courts.

The bill is expected to pass smoothly through the lower house, as the Morena-led coalition government has a two-thirds majority there. After that, it will go to the upper house for a vote, where the government is one seat short of a majority – but experts still believe it will pass without much trouble.

From a financial point of view, the reforms risk leading to a decrease in foreign investment. This, in turn, would reduce demand for the Peso, leading to further depreciation of the currency.

US Ambassador to Mexico Ken Salazar warned that while reforms are needed, the current bill is not the right way to implement them. He warned that it could jeopardize the close relationship between the two countries, which includes a free trade agreement.

“If it’s not done the right way, it could hurt the relationship a lot,” Salazar said at a news conference Tuesday.

Recent data showed the Mexican unemployment rate rose to 2.9 percent in July from 2.8 percent the previous month, in line with expectations. On a seasonally adjusted basis, the Unemployment Rate increased by 2.7% in July, the same as in the previous month, according to INEGI data.

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 is breaking out during its uptrend in a broader rising channel. It briefly broke above the 19.96 mini-range high on Tuesday, reaching 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 ultimately favor higher, taking the pair to new heights.

USD/MXN Daily Chart

A close above 19.98 (September 3 high) would further confirm the continuation of the bull trend, with the next target at the upper channel line in the 20.60s.