When will the Mexican peso recover from the post-election panic?

The Mexican peso is likely to recover from the electoral decline in the coming weeks, as volatility disappears and the carry trade is reaffirmed. He weight is recouping some of its losses as U.S. and Mexican traders return to the office and liquidity improves.

The currency’s overnight plunge was largely due to the possibility of the ruling party, Morena, and its allies gaining a supermajority in Congress. Claudia Sheinbaum was widely expected to win the election, although the magnitude of her victory is a surprise. However, good polls were lacking for the congressional vote.

A two-thirds majority in both chambers would allow Brunette make constitutional changes, which could pose a potential threat to important Mexican institutions, in addition to higher minimum wages. Official estimates suggest that Morena and his allies together have a supermajority in the Lower House, while the Senate is still up for grabs.

Morena, the Green Party and the Labor Party have between 76 and 88 senators, according to the electoral institute’s estimate, and they need 86 to achieve the supermajority. The fact that this is even being talked about has come as a surprise to traders, as can be seen by the spike in implied volatility this morning, in the chart below. However, the constitutional changes that Morena wants are not necessarily a direct threat to the currency.

The big picture is that the Mexican peso has remained very strong over the last two years, driven by optimism about the US economy, generous carry trade and low volatility. These advantages are likely to fade in the second half of the year, as the central bank cuts rates and the US elections raise risks.

However, the carry trade is not going to disappear overnight and previous peso election panics – both after the Mexican and US elections – have turned out to be buying opportunities. The peso should fully recover from today’s drop.