Mexican peso collapses as President AMLO pushes for controversial reforms

The Mexican peso fell to 18.40 against the dollar after AMLO’s remarks on judicial reforms and transparency.
AMLO’s comments on judicial reform and the dissolution of autonomous bodies raise investor concerns.
Mexico’s headline inflation is rising for a third month, while core inflation is falling for the 16th straight month.
Good US employment data increases speculation about prolonged higher Fed interest rates.

The Mexican peso fell to a modern eight-month low against the U.S. dollar on Friday after comments from Mexican President Andres Manuel Lopez Obrador (AMLO) rattled investors who continued to sell the peso amid an uncertain outlook. USD/MXN is trading at 18.39, gaining about 2.30% on the day and expecting weekly gains of 8.30%.

During his usual morning press conference, Mexican President AMLO pushed for judicial reform and reform that included disbanding autonomous bodies such as INAI, the government’s transparency body.

AMLO emphasized his radical rhetoric and stated: “The judicial power has been taken over and its service is being taken over by a minority at the top. I’ve already said it here and they know it very well. It’s downright shameful, but there are ministers who are like employees of gigantic corporations,” says El Financiero.

As a result, USD/MXN rose from around 17.95 to a multi-month high of 18.39 following AMLO’s comments. Traders should be aware that the Mexican peso will be extremely sensitive and volatile amid political uncertainty.

In addition to political commentary, headline inflation in Mexico rose for a third straight month, putting pressure on the Bank of Mexico (Banxico). However, core inflation, which excludes volatile items and provides a clear picture of prices, fell for the 16th month in a row.

Abroad, the latest U.S. jobs report has fueled speculation that the Federal Reserve (Fed) will keep interest rates on hold “for longer,” with the numbers crushing estimates.

Following the data, U.S. Treasury yields rose by more than ten basis points (bps), with the benchmark 10-year note rising to 4.414%, up 12.5 bps on the dollar basis. The U.S. Dollar Index (DXY), which tracks the U.S. currency’s performance against six others, rose 0.74% to 104.86.

On the data side, Mexican car exports rose in May, but less than in April, signaling that the economy is feeling the impact of higher borrowing costs set by Banxico.

Daily Market Roundup: Mexican Peso Continues to Fall on Investor Concerns

On Thursday, Morena’s leader at the Congress, Ignacio Mier, commented that they would present proposals to the newly formed Congress in September.
The most essential proposals include the reform of the Supreme Court, which proposes that the ministers of the Supreme Court be elected by popular vote; reform of the electoral law, which aims to elect INE councilors by universal vote and limit multi-membership; and the reform of autonomous bodies, which entails the dissolution of INAI, the transparency body.
Mexico’s Consumer Price Index (CPI) was 4.69% y/y in May, down from 4.65% in April, while the core CPI fell from 4.37% to 4.21%.
While this fuels speculation of another rate cut at Banxico in June, further depreciation of the Mexican peso could prevent the Mexican Central Bank from easing policy.
Morgan Stanley noted that if Mexico’s future government and Congress adopt an unconventional program, it would weaken Mexican institutions and be bearish for the Mexican peso, which could weaken to 19.20.
The U.S. Bureau of Labor Statistics (BLS) revealed that nonfarm payrolls increased by 272,000 in May, exceeding forecasts of 185,000 and April’s forecast of 165,000.
The U.S. unemployment rate increased from 3.9% to 4%, while average hourly earnings (AHE) increased 4.1% year over year, up from 4%.
Contrary to Thursday’s expectations that the Fed may cut interest rates by 39 basis points at the end of the year. However, the latest U.S. jobs report showed a decline to just 29 basis points, according to the December 2024 CBOT interest rate futures contract.

Technical Analysis: Mexican Peso Loses Sharply as USD/MXN Rise Above 18.20

From a technical perspective, the USD/MXN pair remains bullish and could extend its gains if the pair achieves a fifth daily close above the four-year downward resistance trend line drawn from all-time highs (ATH) of around $25.77, which was broken in Monday. This may be the final nail in the coffin of the Mexican peso’s strength.

The next resistance for the USD/MXN pair will be the October 6 high of 18.48, which could open the door to breaking the psychological mark of 19.00. Once this level is crossed, a peak of 19.23 will occur on March 20, 2023. If all of these levels are broken, the exotic pair could reach the 20.00 level and hit a modern 18-month high.

On the other hand, sellers need to push USD/MXN back below the April 19 high of 18.15 if they want to keep the pair in the 18.00-18.15 trading range.