Mexican peso rebounds as judicial reform faces opposition

• Mexican peso strengthens as fears of approval of judicial reform fade despite Banxico’s dovish attitude.
• The opposition of 43 senators reduces the chances of approval of the reform of the judicial system, alleviating political concerns in Mexico.
• Banxico’s accommodative stance was justified by falling inflation, while business confidence is improving slightly but remains below 50.

The Mexican peso bounced back against the greenback on Monday. Fears that the reform of the judicial system will be approved have faded after 43 opposition senators reiterated their vote against it. USD/MXN is trading at 19.86, down 0.42%.

The USD/MXN pair continues to be driven by political issues. However, the latest inflation report vindicated the Bank of Mexico’s (Banxico) dovish stance as the benchmark and core figures fell to an annual reading.

Other data showed business confidence improved slightly but remained below the 50 mark.

Meanwhile, Julius Baer warned that rating agencies could change Mexico’s credit rating as soon as next year if judicial reform is approved. Erini Tsekeridou, a fixed income analyst, said: “While the economic impact is not yet fully clear, markets are concerned about the potential weakening of the rule of law and the concentration of judicial and executive power, which would reduce oversight and accountability. “

Julius Baer added its name to the ratings warnings of Morgan Stanley, Bank of America, JP Morgan, Citibanamex and Fitch on the economic and financial impact of the approval of the judicial reform.

Across the border, the US economic file revealed the New York Fed’s expectations for consumer inflation, which were unchanged at 3%. However, market players are still eyeing Wednesday’s release of the consumer price index (CPI) for August.

Daily Market Reasons: Mexican Peso Recovers Ground on Expected Judicial Reform Vote

• Inflation in Mexico rose 4.99% in August from a year earlier, below estimates of 5.09% and the previous reading of 5.57%. Core inflation fell by a tenth to 4% from last year.
• Traders expect Banxico to cut interest rates at the upcoming monetary policy decision on September 26.
• Mexico’s economic record remains light. On Wednesday, September 11, the Senate approved the reform of the judicial system. Previously, INEGI will reveal the Industrial Production figures.
• Citibanamex’s September survey showed that Banxico will cut rates to 10.25% in 2024 and 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
• US CPI is expected to fall from 2.9% to 2.6% year-on-year in August, while core CPI is expected to remain at 3.2%.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 104.5 basis points this year, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican Peso Appreciates as USD/MXN Slips Below 20.00

The USD/MXN uptrend remains intact despite the ongoing pullback on the downside that judicial reform could not be approved. However, this will not be known until September 11th.

Momentum is showing signs of running out, however buyers remain in charge even though the Relative Strength Index (RSI) is slightly lower.

If USD/MXN evaluates 20.00, the next ceiling level would be the YTD high at 20.22. Next, the pair could challenge the daily high of September 28, 2022 at 20.57. If these two levels are surrendered, the next stop would be the swing high at 20.82 on August 2, 2022, 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.