Mexican peso stabilizes after falling to new 2024 low

• Mexican peso halts after falling to new low for the year.
• The peso fell on investor concerns about the Mexican government’s controversial proposed justice reforms.
• USD/MXN will be in focus on Friday as the critical US non-farm payrolls data is likely to affect all US dollar pairs.

The Mexican peso (MXN) is trading a touch lower across its key pairs on Friday, stabilizing after a volatile 24-hour period that saw the currency hit new year-to-date (YTD) lows only to bottom out and return. Investor concerns over controversial new reforms to how judges are elected were the main cause of the peso’s strong sell-off.

On Friday, traders will turn their attention north of the border as the much-anticipated US Bureau of Labor Statistics (NFP) non-farm payrolls report for August is scheduled to be released at 12:30 GMT. The data could affect expectations for US interest rates and the value of the US dollar (USD), suggesting that USD/MXN could experience further volatility.

The Mexican peso-US dollar pair in the spotlight

The Mexican peso/US dollar pair is likely to be in focus on Friday ahead of the crucial US NFP data. The US Federal Reserve (Fed) said it was now more concerned about risks to the US labor market than inflation and other signs of weakness could lead it to cut interest rates more aggressively than expected. That, in turn, could weaken the US dollar, as lower interest rates generally make a currency less attractive to investors who prefer higher yields.

Economists expect the NFP data to show the U.S. economy added 160,000 new jobs in August, however, if the data comes in weaker than that estimate — which is itself lower than the average for August — it could sound alarm bells for the economy. That, in turn, will increase the chances that the Fed will cut interest rates by 0.50% at its September 18 meeting – double the benchmark of 0.25%.

Another key measure in the report is the unemployment rate, which is set to fall to 4.2% from 4.3%. However, if it fails or even rises, then that too could put pressure on the Fed to cut rates faster than expected,

A half-percentage point cut in the federal funds rate would lower the Fed’s base rate to a range of 4.75% to 5.00%. Anticipation of such a move would send USD/MXN lower. Market-based odds of a 0.50% cut at the September meeting are currently around 40%, however, if Friday’s jobs data is particularly weak, those odds could increase, leading to a decline in USD/MXN, all other things being equal.

In Mexico, data will be limited to auto exports and production in August. July figures showed exports fell 1.6 percent and manufacturing rose 2.7 percent.

At the time of writing, one US dollar (USD) buys 19.94 Mexican pesos, EUR/MXN trades at 22.16 and GBP/MXN at 26.29.

Mexican peso under pressure amid political reforms

The Mexican peso has been in an established downtrend across most pairs, however, since the government tried to push through a controversial judicial reform bill.

The reforms aim to counter perceived corruption in the judiciary by electing judges by popular vote rather than appointment. However, critics say the bill will compromise the independence of judges and fail to combat corruption, which is more localized among lower-ranking officials and members of law enforcement agencies.

On Wednesday, the government managed to pass the bill, winning the vote by 357 to 130.

The reforms will now be debated in Mexico’s upper house, where the government is one seat short of the two-thirds majority it needs to pass the bill. Most experts believe, however, that it will still be voted on.

After that, it still has to be “sent to 32 local congresses for their approval. Once the bill is approved in 17 of these states, the changes to the Mexican Constitution will be made official,” says FXStreet analyst Christian Borjan Valencia.

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.

U.S. Ambassador to Mexico Ken Salazar said that while justice reforms are needed, he opposes the current bill, which is raising concerns among U.S. investors. 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.

Technical Analysis: USD/MXN makes new YTD high of 20.15

USD/MXN hit fresh 2024 highs on Thursday, peaking at 20.15 before falling back to close close to the opening price. In the process, the price formed a technical setup called the Japanese bearish Shooting Star candlestick (shaded rectangle in the chart below).

This pattern occurs at market tops when the price moves to a peak and then turns all over the same day. It can be evidence of the start of a pullback, a correction or even in some cases a bull trend reversal. If the next day is also bearish, it provides additional bearish confirmation for the Shooting Star. However, until Friday’s close, that won’t be known.

USD/MXN Daily Chart

Another fairly bearish sign is that the Relative Strength Index (RSI) momentum indicator is diverging with price compared to the August 5 peak. At the September 5 peak, the RSI was lower than it was on Thursday, even though the price made a higher high. The disconfirmation from the RSI suggests a lack of bullish momentum accompanying the September peak, which could indicate underlying weakness. Again, it suggests the risk of a pullback developing.

However, despite these bearish signs, the overall trend remains bullish and since, according to the theory of technical analysis, “the trend is your friend”, this favors a larger upside. As such, any weakness may be temporary before the pair rises again.

A break above the Shooting Star high at 20.15 would provide further confirmation of the continuation of the bull trend, with the next target at the upper channel line in the 20.60s.