Mexican peso slips as AMLO’s judicial reform clears lower house

• Mexican peso on the defensive as political turmoil deepens, ignoring foreign investors.
• AMLO’s judicial review bill has passed Mexico’s lower house, awaiting Senate approval amid fierce opposition.
• USD/MXN is trading in the 19.67-19.92 range, with political uncertainty overshadowing the impact of US JOLTS.

The Mexican peso depreciated against the greenback on Wednesday during the North American session as Mexico’s lower house voted and approved President Andres Manuel Lopez Obrador’s (AMLO) judiciary overhaul bill. At the time of writing, USD/MXN was trading at 19.85, up over 0.30%.

Political unrest in Mexico continued on Wednesday. After more than 17 hours of talks, Morena’s ruling party and its allies approved AMLO’s bill with 357 votes in favor and 130 against. Now it’s the Senate’s turn, where Morena is one vote short of what is needed to pass the bill as part of the Mexican Constitution.

Although foreign governments, workers in the Mexican judiciary and international companies expressed concern that the reform threatened the rule of law, Mexico’s Chamber of Deputies approved it.

It is worth noting that on Tuesday, the US ambassador to Mexico, Ken Salazar, expressed that the approval of the reform of the judicial system could affect relations between Mexico and the United States.

Despite this, as traders digested the latest US JOLTS report, USD/MXN remains anchored in the middle of the 19.67-19.92 range. July job postings fell to their lowest level in three and a half years, fueling speculation that the US Federal Reserve (Fed) could cut rates by 50 basis points (bps) at its next meeting in September.

According to the CME FedWatch tool, the odds of a 50 bps Fed rate cut are 43%; while for a quarter of a percentage point, 57%.

This week, the US economic file will feature the release of the ADP National Employment Change, Initial Jobo Claims, S&P and ISM Services PMIs and the Nonfarm Payrolls (NFP) report on Friday.

Daily Market Reasons: Mexican peso on back on limited economic record

• Mexico’s data released this week show the economy is slowing, in part due to higher interest rates set by the Bank of Mexico.
• On Tuesday, the unemployment rate ticked close to the 3% mark, while business activity in the manufacturing sectors contracted.
• The file will present Mexico auto industry data on Friday, ahead of next week’s inflation data.
• Most banks expect the Bank of Mexico (Banxico) to cut rates by at least 50 basis points (bps) for the rest of 2024. That would put pressure on the Mexican currency, which has already depreciated 17.38% year-to-date (YTD).
• US JOLTS job openings in July fell from June’s downward revision of 7.910 million to 7.673 million.
• US factory orders for the same period rose sharply from a -3.3% decline on June 5 to a 5% increase.
• U.S. nonfarm payrolls in August are expected to rise from 114,000 to 163,000, while the unemployment rate is expected to fall from 4.3% to 4.2%.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 103 basis points this year, up from 96.5 bps a day ago, according to the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso weakens as USD/MXN rises above 19.85

The political development sponsored an advance in USD/MXN, which retreated somewhat after hitting a weekly high of 19.98. As judicial reform cleared the first hurdle, traders ditched Mexican currency and began buying the greenback.

USD/MXN buyers need to break the weekly high before testing the 20.00 figure. A breach of the latter will expose the YTD high at 20.22, followed by the daily high of September 28, 2022 at 20.57. If these two levels are taught, the next stop would be August 2, 2022 at 20:82, before 21:00.

Conversely, if USD/MXN weakens further, the first support would be 19.50. A breach of the latter will expose the August 23 low of 19.02 before giving way to sellers eyeing a test of the 50-day simple moving average (SMA) at 18.65.