• Sun. Jun 23rd, 2024

The Mexican Peso Falls as President AMLO Presses for Contentious Changes

Leon Kramer

ByLeon Kramer

Jun 8, 2024
The Mexican Peso Falls as President AMLO Presses for Contentious Changes

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  • The Mexican Peso experienced a significant decline, reaching a rate of 18.40 against the USD, following AMLO’s comments regarding reforms in the judicial and transparency sectors.
  • Investor concerns are sparked by AMLO’s remarks regarding judicial reform and the dissolution of autonomous bodies.
  • Inflation in Mexico continues to climb for the third consecutive month, while core inflation experiences its 16th successive month of decline.
  • Positive US employment data fuels speculation of an extended period of higher interest rates set by the Federal Reserve.

The Mexican Peso plummeted to a fresh low against the US Dollar on Friday following remarks from Mexican President Andres Manuel Lopez Obrador (AMLO) that unsettled investors. This led to a continued sell-off of Pesos due to an uncertain future. The USD/MXN is currently trading at 18.39, experiencing a notable increase of around 2.30% for the day. Furthermore, it is on track to achieve significant weekly gains of approximately 8.30%.

At his routine daily press briefing, Mexican President AMLO highlighted two proposals: one to reform the judiciary and another to dismantle autonomous groups like the INAI, the government’s transparency council.

Speaking absolutely, AMLO said, “The judicial power is under the control of a few individuals at the highest level.” They’ve been aware of this since I brought it up previously. According to El Financiero, it is regrettable but true that certain ministers resemble corporate personnel.

Consequently, after AMLO’s remarks, the USD/MXN spiked from around 17.95 to a multi-month high of 18.39. Due to the current political uncertainties, traders should be aware that the Mexican peso will display a high degree of sensitivity and volatility.

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The Bank of Mexico (Banxico) is under pressure from a number of sources, including political comments and a third month running of sharply rising headline inflation in Mexico. But for the sixteenth month in a row, core inflation fell. Core inflation is a better indicator of price trends since it does not include volatile goods.

Over in the US, expectations have been building that the Fed will keep interest rates on hold for a while now, according to the latest jobs report. Even more exciting is the fact that the report’s numbers have blown everyone’s expectations.

Based on the data, US Treasury bond yields experienced a significant increase of over ten basis points (bps). The 10-year benchmark note rose to 4.414%, marking a rise of 12.5 bps, which had a positive impact on the value of the Greenback. The US Dollar Index (DXY), which monitors the progress of the American currency in comparison to six others, increased by 0.74% to reach 104.86.

In terms of data, Mexican Auto Exports saw a rise in May, although the increase was less significant than in April. This suggests that the economy is starting to feel the effects of the higher borrowing costs implemented by Banxico.

The Ongoing Decline of the Mexican Peso Persists as Investors Remain Concerned

  • On Thursday, Ignacio Mier, the leader of Morena at the Congress, stated that they will present the suggestions to the recently formed Congress in September.
  • A number of substantial suggestions have been proposed with the intention of implementing substantial improvements. Reforming the Supreme Court by having its ministers elected by the people is one such suggestion. Reducing multi-membership and shifting the focus to electing INE councilors by the majority vote is the goal of another electoral reform proposal. Finally, a plan to reorganize autonomous entities has been put forward, and it includes dissolving INAI, the transparency body.
  • In May, Mexico’s Consumer Price Index (CPI) slightly increased compared to April, with a YoY rate of 4.69% versus 4.65%. However, the core CPI showed a slight decrease from 4.37% to 4.21%.
  • Speculations are swirling about the possibility of another rate cut by Banxico in June. However, if the Mexican Peso continues to depreciate, it may hinder the Mexican Central Bank from implementing further policy easing.
  • Morgan Stanley pointed out that if Mexico’s incoming government and Congress were to embrace an unconventional agenda, it could negatively impact Mexican institutions and the Mexican Peso, potentially leading to a depreciation of 19.20.
  • The US Bureau of Labor Statistics (BLS) recently released data showing that the number of Nonfarm Payrolls in May rose by 272,000, surpassing expectations of 185,000 and April’s figure of 165,000.
  • The US unemployment rate experienced an increase from 3.9% to 4%, whereas there was a rise of 4.1% year over year in average hourly earnings (AHE), up from 4%.
  • Despite earlier forecasts to the contrary, Thursday’s estimates hinted that the Federal Reserve would cut rates by 39 basis points later this year. However, according to the CBOT fed funds future rate contract for December 2024, the most recent US jobs report saw a reduction to just 29 basis points of easing.

The Mexican Peso Experiences a Significant Depreciation as the USD/MXN Exchange Rate Rises Above 18.20

From a technical perspective, the USD/MXN appears to be in a bullish trend and could continue to rise if the pair manages to close above a downward resistance trendline that has been in place for four years, originating from the all-time highs at approximately $25.77. This trendline was breached on Monday. That might be the final blow to the Mexican Peso’s strength.

The USD/MXN may encounter its next hurdle at the October 6 peak of 18.48, potentially paving the way for a test of the significant 19.00 level. After surpassing that threshold on March 20, 2023, a peak of 19.23 would ensue. If all those thresholds are exceeded, the unique pair could reach 20.00 and achieve a fresh 18-month peak.

However, sellers must aim to bring the USD/MXN below the peak of 18.15 on April 19 in order to maintain the pair’s trading range between 18.00 and 18.15.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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