Mexican Peso extends losses as lawmakers pass controversial bill
- Mexican Peso on defensive as political turmoil deepens, ignoring foreign investors.
- AMLO’s judicial overhaul bill passes Mexico’s lower house, awaiting Senate approval amid fierce opposition.
- USD/MXN trades in 19.67-19.92 range with political uncertainty overshadowing US JOLTS impact.
The Mexican Peso depreciated against the Greenback on Wednesday during the North American session as the Mexican lower house voted and approved President Andres Manuel Lopez Obrador’s (AMLO) bill to overhaul the judicial system. At the time of writing, the USD/MXN traded at 19.92, rising over 0.70%.
Mexico’s political turmoil continued on Wednesday. After more than 17 hours of discussion, Morena’s ruling party and its allies approved AMLO’s bill with 357 votes in favor and 130 against. Now it’s the turn of the Senate, where Morena is one vote short of what’s needed to pass the bill into law as part of the Mexican Constitution.
Although foreign governments, workers of the Mexican court system, and international companies expressed concerns that the reform threatened the rule of law, Mexico’s Chamber of Deputies approved it.
It is worth noting that on Tuesday, the US Ambassador in Mexico, Ken Salazar, expressed that the approval of the judiciary reform could damage relations between Mexico and the United States.
Despite that, as traders digested the latest US JOLTS report, the USD/MXN remains anchored in the middle of the 19.67-19.92 range. Job openings in July fell to their lowest level in three-and-a-half years, sparking speculation that the US Federal Reserve (Fed) might cut rates by 50 basis points (bps) at the upcoming September meeting.
According to the CME FedWatch Tool, odds for a 50 bps Fed rate cut are at 43%; while for a quarter of a percentage point, 57%.
Ahead this week, the US economic docket will feature the release of the ADP National Employment Change, Initial Jobless Claims, S&P and ISM Services PMI data, and the Nonfarm Payrolls (NFP) report on Friday.
Daily digest market movers: Mexican Peso on backfoot on scarce economic docket
- Mexico’s data revealed during the week show the economy is decelerating, due in part to higher interest rates set by the Bank of Mexico.
- On Tuesday, the Unemployment Rate ticked close to the 3% threshold, while business activity in the manufacturing sectors shrank.
- The docket will feature Mexico’s automobile industry data on Friday, ahead of next week’s inflation data.
- Most banks expect the Bank of Mexico (Banxico) to reduce rates by at least 50 basis points (bps) for the remainder of 2024. This would pressure the Mexican currency, which has already depreciated 17.38% year to date (YTD).
- US JOLTS Job Openings in July dropped from June’s 7.910 million downward revision to 7.673 million.
- US Factory Orders for the same period rose sharply from a -3.3% plunge on June 5 to 5% growth.
- US Nonfarm Payrolls in August are expected to grow from 114K to 163K, while the Unemployment Rate is foreseen to tick lower from 4.3% to 4.2%.
- Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 103 basis points this year, up from a day ago’s 96.5 bps, according to the fed funds rate futures contract for December 2024.
Technical outlook: Mexican Peso weakens as USD/MXN rallies above 19.85
Political development sponsored a leg-up in the USD/MXN, which retreated somewhat after hitting a weekly high of 19.98. As the judicial reform overcame the first obstacle, traders ditched the Mexican currency and began to buy the Greenback.
USD/MXN buyers need to clear the weekly high before testing the 20.00 figure. A breach of the latter will expose the YTD high at 20.22, followed by the September 28, 2022 daily high at 20.57. If those two levels are surrendered, the next stop would be August 2, 2022 swing high at 20.82, ahead of 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 swing low of 19.02 before giving way for sellers eyeing a test of the 50-day Simple Moving Average (SMA) at 18.65.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.