Mexican Peso dives amid US election fears, judicial reform concerns
- Mexican Peso falls to a six-week low as former President Trump leads US election polls, threatening a 200% tariff on Mexican cars.
- Fears of a constitutional crisis in Mexico intensify after President Sheinbaum defies a court ruling to remove a judicial reform decree.
- Investors shift focus to upcoming economic data from both Mexico and the US with Retail Sales and inflation figures in the spotlight.
The Mexican Peso plunges more than 0.90% against the US Dollar amid a risk-off impulse and increasing odds that former President Donald Trump leads the polls. Rising fears of a constitutional crisis in Mexico weighed on the emerging market currency, which extended its fall to a six-week low. At the time of writing, the USD/MXN trades at 20.03 after bouncing off a daily low of 19.82.
Financial markets' focus has shifted toward the US election. Traders are putting aside Q3 earnings until the election passes. Recently published polls suggest the race is tightening, and former President Donald Trump looks more capable of winning the presidential election on November 5. Last week, he said he would impose a 200% tax on Mexican-made cars. Such a move has weighed on the Mexican currency, which is about to hit three-month lows.
On the Mexican front, last Thursday the 19th District Court based in Coatzacoalcos, Veracruz, and led by Judge Nancy Juarez Salas, granted a definitive suspension, ordering Mexican President Claudia Sheinbaum and the director of el Diario Oficial de la Federacion (the Government’s official gazette) Alejandro Lopez Gonzalez to remove the decree that validates the judicial reform from the official gazette.
In response, President Sheinbaum said that the judge is “not above” the country and declared, “We are not going to lower the publication,” adding that they will file a complaint with the Federal Judicial Council.
As of writing, the decree hasn’t been removed from the Mexican official gazette, which has sparked fears of a probable constitutional crisis.
Meanwhile, an absent economic docket on both sides of the border keeps investors digesting China’s stimulus to boost the economy. China’s central bank, the People’s Bank of China (PBoC), lowered rates for the one and five-year Loan Prime Rate (LPR). Trump announced on the campaign trail that he would impose tariffs on the country if China invades Taiwan.
Meanwhile, Dallas Fed President Lorie Logan commented that money markets are close to or just above interest on reserves rate. She favors a gradual approach to easing policy if the economy meets forecasts.
Mexico’s economic schedule will be slightly busy ahead of the week with the release of the Economic Activity indicator, Retail Sales, and Mid-Month Inflation for October.
On the US front, Fed speakers, jobs data and S&P Global Flash PMIs should influence the USD/MXN direction.
Daily digest market movers: Mexican Peso on the defensive ahead of crucial data
- Mexico’s Economic Activity is expected to slow from 3.8% to 0.9%.
- October Mid-Month Inflation is expected to drop from 3.95% to 3.83%, and underlying inflation is expected to fall from 4.66% to 4.63%.
- The International Monetary Fund (IMF) projected the Mexican economy to grow 1.5% in 2024, lower than in its previous forecast. The IMF estimates a deeper economic slowdown for the next year, estimating 1.3% GDP growth, and forecasts inflation to hit Banxico’s 3% goal in 2025.
- The IMF said that a recent judicial reform creates "important uncertainties about the effectiveness of contract enforcement and the predictability of the rule of law."
- US Initial Jobless Claims for the week ending October 19 are foreseen rising from 241K to 247K.
- US business activity for October is expected to edge up in the manufacturing sector, according to S&P Global. Services PMI is foreseen dipping from 55.2 to 55.
- Data from the Chicago Board of Trade, via the December Fed funds rate futures contract, shows investors estimate 46 bps of Fed easing by the end of the year. This is somewhat lower than a week ago.
USD/MXN technical outlook: Mexican Peso dives as USD/MXN climbs above 19.90
The USD/MXN exotic pair is upwardly biased, and it could test the year-to-date (YTD) high at 20.22 in the near term. Momentum remains bullish, as the Relative Strength Index (RSI) portrays.
If USD/MXN clears the September 5 high at 20.14, the next resistance would be the YTD high at 20.22. On further strength, the next stop would be 20.50, followed by the 21.00 figure.
Conversely, if the USD/MXN tumbles below 20, the next support would be an October 18 low of 19.64. A breach of the latter will expose the October 10 daily peak at 19.61, followed by the October 4 swing low of 19.10 before testing 19.00.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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