Mexican peso weakens amid concerns over judicial reforms and conciliatory comments from Banxico

• The Mexican peso slips as investors worry about the possible approval of controversial reforms to the judiciary that could increase political risks.
• Morena’s supermajority in Congress increases fears of constitutional changes, leading to greater concentration of power and higher risk premiums.
• The harmonious comments of the vice-governor of Banxico, Galia Borja, bring pressure.

The Mexican peso is starting the week on the back foot, reversing most of last Friday’s gains. Losses of more than 1.80% are seen in the peso amid fears that the Mexican Congress may approve the bill on the reform of the judicial system and deputy comments from Vice Governor Galia Borja. At the time of writing, USD/MXN is trading at 19.42 after rebounding to a daily low of 19.08.

Last Friday, the Instituto Nacional Electoral (INE) approved the ruling Morena party’s supermajority in the Mexican Congress, raising investor concerns that approval of controversial changes to the Mexican Constitution could increase the country’s risks.

This is one of the main drivers of the USD/MXN price action on Monday. Now that Morena controls the lower house, risks that the judicial reform will be approved have increased, weighing on the Mexican peso. Some analysts cited by El Financiero said the constitutional changes could lead to a greater concentration of power in the executive and could impact the rule of law.

Last week, Morgan Stanley advised its clients not to invest in Mexican stocks, citing fears that reform of the judicial system could increase risk premiums in the country.

On Monday, the deputy governor of the Bank of Mexico, Galia Borja, was interviewed by El Economista. She said that since the decision in June when the Board of Governors left rates unchanged at 11.00%, they already had some elements of an economic slowdown in the second quarter.

“In the August decision, it was confirmed that economic activity is weakening compared to what we expected, which was effectively confirmed with Q2 GDP data,” Borja said.

She said the rate cuts in March and August did not imply an abandonment of restrictive policy. Borja added that “the fact that we’re adjusting it like we did in March and August (of 2024) doesn’t mean we’re going into neutral or accommodative territory. This will take some time. So from now on, there will be another period where the tight monetary stance will continue.”

Mexico’s economic record will remain light. The trade balance is expected to be released on August 27.

Across the border, Federal Reserve (Fed) Chairman Jerome Powell, who gave the go-ahead last week to start easing monetary policy, hurt the greenback against most G7 currencies. However, the US dollar has gained some ground against the emerging market Mexican peso.

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

• Another factor that weakened the Peso was the escalation of the Israel-Hezbollah conflict in the Middle East.
• Mexico’s trade balance is expected to show a deficit of -$1.47 billion in July, up from -$1.03 billion in June.
• Traders will be watching the US Conference Board Consumer Confidence release for August, Fed speakers, Q2 2024 GDP release and the Fed’s preferred gauge of inflation, the headline Consumer Expenditure (PCE) price index.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 97 basis points (bps) under the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso weakens as USD/MXN rises above 19.30

The USD/MXN daily chart suggests that the uptrend remains intact, although buyers need to lift the exchange rate above last week’s peak at 19.53, which could exacerbate a rise to the psychological 20.00 mark. If these levels are broken, the next stop would be the year-to-date (YTD) high at 20.22.

Conversely, if USD/MXN breaks below 19.00, this could pave the way for a downside move. First support would be the August 19 low of 18.59, followed by the 50-day Simple Moving Average (SMA) at 18.48.