Mexican peso falls as fears over judicial reform resurface

• Mexican peso weakens as USD/MXN climbs on judicial reform themes after new Congress convenes.
• Business confidence in Mexico improves slightly in August, while manufacturing PMI hits a two-year low, pointing to sectoral challenges.
• S&P Global cites weak sales, competition from China and highway insecurity as key issues for Mexican manufacturers.

The Mexican peso starts September on a lower note, falling more than 0.50% amid renewed fears that reform of the judicial system is a trial and could be approved in the first week of the new Mexican Congress that took office on September 1. USD/MXN is trading at 19.80 after bouncing off a daily low of 19.60.

Mexico’s economic file showed business confidence in August improved slightly compared to July data. Meanwhile, business activity in August, as measured by the S&P Global Manufacturing PMI, fell to the lowest level in two years, the agency revealed.

Pollyanna De Lima, Economic Associate Director at S&P Global Market Intelligence, commented: “August proved to be another difficult month for Mexican manufacturers, with firms reducing production, employment and inventories due to reduced sales in both domestic and and the international ones. The total volume of the order book fell by the most in two years, which bodes ill for the near-term production outlook.”

De Lima added that companies have become concerned about “intense competition from China and the insecurity of highways.”

At the same time, Mexican business confidence improved, driven by a minimal improvement in the propensity to invest, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed.

Across the border, Wall Street remains closed for the Labor Day holiday. Activities will resume on Tuesday, although traders are eyeing the release of employment data on Friday. Non-Farm Payrolls (NFP) for August are expected to beat July data.

Meanwhile, the latest inflation report from the US Bureau of Economic Analysis (BEA) showed that the Personal Consumption Expenditure (Fed) Price Index, the Fed’s preferred gauge, was unchanged at around 2.5% YoY.

Daily market reasons: Mexican peso on the defensive amid political turmoil

• Business confidence improved from 53 to 53.2, expanding for a third straight month, but remains below January’s high of 54.4.
• The S&P Global Manufacturing PMI contracted for a second straight month from 49.6 to 48.5, suggesting Mexico’s economic slowdown is deeper than expected.
• 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 15.38% year-to-date (YTD).
• The USD/MXN rally extends on the hopes of a judicial reform approval, triggering a safety flight to the US dollar.
• In that regard, a judge granted a stay over the weekend to prevent the proposal from being debated. The initiative has sparked a strike in the judiciary, strained relations with the United States and rattled local markets amid widespread doubts it engenders.
• Mexican President Andres Manuel Lopez Obrador’s decision to cut ties with the US and Canadian ambassadors this week will continue to weigh on the Mexican peso.
• 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 96.5 basis points (bps), according to the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso weakens as USD/MXN climbs above 19.70

The USD/MXN uptrend remains in place, with the pair consolidating in the 19.50-20.00 range for the first trading day of September. Momentum looks even more bullish as the Relative Strength Index (RSI) is bullish and has moved flat from being tilted down.

If USD/MXN buyers clear the 20.00 figure, there are plenty of additional upside targets. The next resistance would be the YTD high at 20.22, followed by the September 28, 2022 daily high at 20.57. If these two levels are taught, the next stop would be August 2, 2022, swing high at 20.82, before 21.00.

On further USD/MXN weakness, 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 18.62.