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Mexican Peso drops amid traders anxiety over judiciary reform

  • Mexican Peso plunges as fears of judicial reforms by Congress spark foreign investor sell-off.
  • Political tension escalates after President Lopez Obrador halts ties with US Embassy over reform critiques.
  • Trade data overlooked; smaller-than-expected trade deficit eclipsed by political focus.

The Mexican Peso tumbled sharply, sparked by foreign investors’ fears that the upcoming Mexican Congress could approve the judiciary reform. Nevertheless, a commission of deputies approved the ruling on the reform, which is expected to be voted on once the new Congress takes office on September 1. This sparked fears among investors, which ditched the Mexican Peso as the USD/MXN trades at 19.64, posting gains of over 1.20%.

Mexico’s economic docket revealed that the Balance of Trade printed a deficit of $-0.072 billion, less than the $-1.35 billion expected by most analysts. However, analysts ignored this, remaining eyed on Mexico’s political developments.

The USD/MXN rose sharply after newswires revealed that Mexico’s President Andres Manuel Lopez Obrador said there is a “pause” in their relationship with the US Embassy after the Ambassador commented on proposed judicial reform.

On August 22, US Ambassador Ken Salazar said, “Based on my lifelong experience supporting the rule of law, I believe that the direct election of judges represents a major risk to the functioning of Mexico’s democracy. Any judicial reform must have safeguards that guarantee that the judiciary is strengthened and not subject to the corruption of politics.”

The Canadian Ambassador to Mexico, Graeme C. Clark, echoed some of his comments during the Mexico-Canada business forum. Clark commented that the reform has raised doubts about the stability of the legal framework in Mexico, which is essential to maintaining the confidence of foreign investors.

Across the border, the US economic docket featured the Conference Board (CB) Consumer Confidence for August, which was expected to deteriorate from 101.9 in July to 100.7, according to analysts. Nevertheless, consumers grew more optimistic about the US economy, with the index rising to 103.3.

This boosted the Greenback against most emerging market FX currencies, even though Federal Reserve (Fed) Chair Jerome Powell gave the green light last week to begin reducing interest rates. This hurt the Greenback’s prospects against most G7 FX currencies, but the US Dollar continues gathering steam over the Mexican Peso.

Daily digest market movers: Mexican Peso depreciates also on geopolitical risks

  • Another driver that pressures the Peso was the escalation of the Israel-Hezbollah conflict in the Middle East.
  • Traders will eye Fed speakers, the release of US Q2’s 2024 GDP, and the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Price Index (PCE).
  • Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 100 basis points (bps), according to the fed funds rate futures contract for December 2024.

Technical outlook:  Mexican Peso weakens as USD/MXN hits 19.70

The USD/MXN uptrend remains in place, with buyers gaining momentum as the exotic pair reached a two-week peak of 19.70, a level last hit on August 5. The Relative Strength Index (RSI) hints that bulls are in charge, which means the pair could aim higher.

If USD/MXN clears 19.70, the next resistance would be the 20.00 figure, followed by the current year-to-date (YTD) high at 20.22. Once cleared, further gains are seen, with the 20.50 supply area up next.

Conversely, if USD/MXN tumbles below 19.50, this could expose the 19.00 figure. A breach of the latter and further losses are expected, with the following support being the August 19 low of 18.59, followed by the 50-day Simple Moving Average (SMA) at 18.48.

Banxico FAQs

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.