Introduction

The Mexican Peso plummeted to an eight-month low against the US Dollar on Friday, driven by a combination of political uncertainty and economic pressures. The USD/MXN exchange rate surged to 18.39, marking a daily gain of approximately 2.30% and setting the stage for a weekly increase of 8.30%.

Political Instability and Market Reaction

AMLO’s Controversial Remarks

During his routine morning press conference, Mexican President Andres Manuel Lopez Obrador (AMLO) made comments that unsettled investors. He reiterated his commitment to judicial reform and the dissolution of autonomous bodies, including the National Institute for Transparency, Access to Information, and Personal Data Protection (INAI). AMLO’s rhetoric was particularly pointed, as he accused the judicial system of being controlled by a minority elite. “The judicial power is hijacked, the service is taken over by a minority of those at the top. I have already said it here, and they know it very well. It is even shameful, but there are ministers who are like employees of large corporations,” he stated, according to El Financiero.

Immediate Market Impact

Following AMLO’s remarks, the USD/MXN exchange rate spiked from around 17.95 to a multi-month high of 18.39. This sudden movement underscores the Peso’s sensitivity to political developments and the volatility that can ensue from such uncertainty.

Economic Indicators and Pressures

Rising Inflation in Mexico

Adding to the Peso’s woes, Mexico’s headline inflation increased for the third consecutive month, putting additional pressure on the Bank of Mexico (Banxico). However, the underlying inflation, which excludes volatile items, fell for the sixteenth straight month. This mixed inflationary trend complicates Banxico’s policy decisions, as rising headline inflation suggests a need for tighter monetary policy, while falling core inflation might argue for easing.

US Economic Data and Fed Policy

Across the border, robust US economic data further complicated the scenario. The latest US employment report exceeded expectations, fueling speculation that the Federal Reserve (Fed) might maintain higher interest rates for a longer period. US Treasury bond yields rose significantly, with the 10-year benchmark note climbing to 4.414%, an increase of 12.5 basis points. This surge in yields supported the US Dollar, with the US Dollar Index (DXY) rising 0.74% to 104.86.

Mexican Auto Exports and Economic Impact

In May, Mexican Auto Exports increased, though the growth was slower compared to April. This slowdown reflects the broader economic impact of higher borrowing costs imposed by Banxico. The combination of rising inflation and higher interest rates is likely to weigh on economic activity, further challenging the Peso.

Legislative Proposals and Future Outlook

Morena’s Legislative Agenda

On Thursday, Ignacio Mier, the leader of Morena in Congress, announced plans to submit several significant reforms to the newly established Congress in September. These proposals include:

• Supreme Court Reform: Electing Supreme Court ministers by popular vote.
• Electoral Reform: Electing INE councilors by popular vote and reducing multi-membership.
• Reform of Autonomous Bodies: Dissolving INAI, the transparency body.

Implications for Banxico and the Peso

Mexico’s Consumer Price Index (CPI) for May was 4.69% year-over-year, up from 4.65% in April, while core CPI decreased from 4.37% to 4.21%. These figures have sparked speculation about a potential rate cut by Banxico in June. However, the further depreciation of the Mexican Peso could deter the Central Bank from easing its policy.

Morgan Stanley has warned that if Mexico’s upcoming government and Congress adopt an unorthodox agenda, it could undermine Mexican institutions and negatively impact the Peso, potentially weakening it to 19.20 against the US Dollar.

US Employment Data and Fed Rate Expectations

Strong Nonfarm Payrolls

The US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls increased by 272,000 in May, surpassing forecasts of 185,000 and April’s figure of 165,000. Despite this strong job growth, the US Unemployment Rate rose from 3.9% to 4%, and Average Hourly Earnings (AHE) grew by 4.1% year-over-year, up from 4%.

Fed Rate Cut Speculations

Earlier in the week, there were expectations that the Fed might cut rates by 39 basis points by the end of the year. However, following the robust jobs report, the anticipated rate cut has been scaled back to just 29 basis points, according to the December 2024 CBOT fed funds future rate contract.

Conclusion

The Mexican Peso’s recent decline highlights the complex interplay between political uncertainty and economic pressures. President AMLO’s controversial remarks and legislative proposals have rattled investors,while rising inflation and higher borrowing costs add to the Peso’s challenges. Across the border, strong US economic data and the prospect of prolonged higher interest rates by the Fed further complicate the outlook for the Peso. As Mexico navigates these turbulent waters, the Peso is likely to remain highly sensitive to both domestic and international developments.