Mexican peso falls amid heightened Senate tensions over judicial reform

• Mexican peso falls by more than 1%; USD/MXN rises from 19.86 as Senate moves closer to vote on judicial reform.
• Foreign rating institutions and agencies suggest economic risks and possible downgrade if the reform is approved.
• Weaker-than-expected inflation raises the likelihood of a rate cut at Banxico on September 26; The US Fed has anticipated that it will cut rates by 25 bps soon.

The Mexican peso depreciated more than 1% against the US dollar on Tuesday amid rising tensions over the Senate’s approval of judicial reform. At the time of writing, USD/MXN is trading at 20.07 after recovering from a daily low of 19.86.

The Mexican currency will remain volatile throughout the week as the Senate debates judicial reform. On Monday, a news article in El Sol de Mexico said Miguel Angel Yunez Marquez, a senator from the opposition Partido Accion Nacional (PAN), would be the vote needed to approve the reform.

The Senate will start formally reading the bill at around 19:00 GMT. It is expected to be voted on on Wednesday or Thursday.

Foreign institutions had expressed that the reform could damage the rule of law and the country’s credibility. Julius Baer warned that rating agencies could change Mexico’s credit rating. They added their names Morgan Stanley, Bank of America, JP Morgan, Citibanamex and Fitch, warning of the economic and financial impact of approving judicial reform.

On the data front, the latest consumer price index (CPI) reported on Monday showed that Mexican inflation was weaker than expected, increasing the chances that the Bank of Mexico (Banxico) will cut interest rates at its September 26 meeting .

Capital Economics analyst Kimberley Sperrfechter commented that the latest inflation report and the likelihood of a Fed rate cut next week “mean Banxico is on track to cut its policy rate by another 25 (basis points) to his meeting this month. “

Across the border, a Reuters poll showed 92 out of 101 economists expect the Federal Reserve (Fed) to cut interest rates by 25 basis points (bps) at its September 17-18 meeting. The US economic record was limited in the first two days, however traders are eyeing the release of the latest inflation report. The data is expected to reassure investors that the Fed will cut rates at its next meeting.

Daily market reasons: Mexican peso weakens on expected vote on judicial reform

• Inflation in Mexico in August fell below 5% from the headline figures on an annual basis, while core inflation remained firm near 4% on the year.
• Mexico’s economic program will gain ground on Wednesday, September 11, with the release of industrial production data. Later, the Senate will approve the reform of the judicial system.
• 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 108 basis points this year, up from 104.5 a day earlier, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican peso falls as USD/MXN climbs above 20.00

USD/MXN’s uptrend extended above the 20.00 mark, with the exotic pair snaking around the figure after hitting a daily high of 20.13. Momentum suggests that buyers are stepping in, as depicted by the Relative Strength Index (RSI) which is aiming higher and hitting its most recent high.

If USD/MXN holds on to gains above 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.