The Mexican peso: from strength to volatility after Sheinbaum’s victory

He Mexican pesoone of the most traded currencies in the world, strengthened until it earned the nickname “superweight”, but the landslide victory in the general elections of Claudia Sheinbaum and the left, with their promises of reforms, pushed the currency towards volatility.

In the two years prior to the June 2 election, the peso appreciated almost 14% against the dollar, according to the Bank of Mexico (Banxicocentral), something that President Andrés Manuel López Obrador boasts of as an achievement.

But after the elections the currency fell up to 10% due to fears that the future president has obtained a blank check for her announced constitutional reforms thanks to the majorities she will have in Congress.

“It is a broad mandate for Sheinbaum and it makes the market a little nervous, especially because of the reforms”fiancees, he explains to AFP Luis Gonzalivice president and co-chief investment officer at the firm Franklin Templeton.

Daily transactions in Mexican pesos average about US$114 billion, according to the Bank for International Settlements (BIS), owned by 63 central banks. This is a figure higher than other emerging currencies such as the Brazilian real.

Here are the key points that explain the ups and downs of the currency of Mexico, the world’s twelfth largest economy and the United States’ main trading partner.

What drove the Mexican peso?

The Mexican peso appreciated for months due to the interest rate differential between the United States and Mexico, which offers higher returns to investors who position themselves in the Mexican currency.

The remittances sent by Mexican migrants, mainly from the United States and which totaled 63,313 million dollars in 2023, 7.6% more compared to 2022, represent a strong demand for pesos by those who receive them.

In addition to this increased supply of dollars, the peso has been benefiting from the prospect of increased investments due to nearshoring, or the relocation of companies, especially from Asia, to the border with the United States.

Why did the peso depreciate after the election?

Although the markets had assumed a triumph for Sheinbaum over the center-right Xochitl GalvezThe composition of Congress was surprising, which also caused a stock market crash.

The Morena party and its allies are on track to have a supermajority in the bicameral Congress that will be installed on September 1, so the ruling party will be able to modify the Constitution without negotiating with other forces.

Sheinbaum, who will take office on October 1, promises to carry out a series of reforms proposed by Lopez Obradortheir political godfather, including a profound surgery on the Judiciary, which both accuse of being corrupt and serving private interests.

For Erick Martinezforeign exchange market strategist at the British bank Barclaysthere was “overreaction” initial message from investors after election day.

“It was similar to other episodes of high volatility (such as the pandemic or the election of Donald Trump in 2016), despite the fact that there are no details on the implementation of the reforms nor are there implications in terms of a deterioration in public finances.s”, he tells AFP.

In the midst of the nervousness of the markets, Sheinbaum He was quick to confirm the Secretary of the Treasury, Rogelio Ramírez de la O, in his position.

Why is the market concerned about judicial reform?

The proposal seeks to have Supreme Court justices and hundreds of judges elected by popular vote starting in 2025, which the opposition says threatens to politicize justice.

Currently, members of the Supreme Court are nominated by the president and submitted to the Senate for approval. Others are appointed by the Federal Judicial Council, which is in charge of administering the judiciary.

Sheinbaum announced debates on the reform, which would include specialists.

“The issue is that they are changing the rules of the game and no investor or company likes that.“, says Luis Gonzali.

“What is most worrying is that it could imply a lower balance between powers, with greater concentration in the Executive“, warns Erick Martínez.

What else can affect weight?

The Spanish bank BBVA estimates that in the coming months the peso will continue to show “certain volatility, being subject to greater uncertainty than normal”.

In addition to judicial reform, this instability is linked to the presidential election in the United States, where Democrat Joe Biden will face Republican Trump for the presidency on November 5.

BBVA forecasts an upward exchange rate of around 19 pesos per dollar by the end of this year, while Barclays expects 19.20 pesos.

IT MAY INTEREST YOU