Mexico’s peso is weakening amid growing political uncertainty. Recent judicial reforms have curtailed the judiciary’s power to challenge constitutional changes, and President Sheinbaum’s disregard for a federal judge’s order has further eroded concerns about the rule of law. Coupled with the potential threat of US tariffs under a potential Trump presidency, these factors are putting significant pressure on the Mexican currency.
The Mexican Peso weakened on Friday, driven by political uncertainty stemming from recent judicial reforms. Investors are concerned that these reforms could erode the rule of law, impacting Mexico’s creditworthiness. The USD/MXN pair is currently trading at 19.95, up 0.80%.
Despite positive global market sentiment, the Peso’s gains are being capped by domestic political risks. The recent approval of a reform limiting the judiciary’s power to challenge constitutional changes has raised concerns about a potential power imbalance.
Additionally, the looming threat of US tariffs under a potential Trump presidency is adding pressure to the currency. While recent US economic data, such as the University of Michigan Consumer Sentiment Index, showed some positive signs, it wasn’t enough to offset the negative impact of domestic political factors.
Key Fundamental Drivers for the Mexican Peso
Domestic Factors:
- Inflation Outlook: A mixed inflation report for the first half of October has dampened expectations for a significant 50bps rate cut by the Bank of Mexico (Banxico) in its upcoming November meeting. While a rate cut is still anticipated, the magnitude might be smaller than previously expected.
External Factors:
- US Economic Data:
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- Durable Goods Orders: A decline in US Durable Goods Orders in September, coupled with a slowdown in core shipments, suggests a potential weakening in US manufacturing activity. This could have implications for global demand and, consequently, for the Mexican economy.
- Consumer Sentiment: A slight improvement in US Consumer Sentiment in October indicates a more optimistic outlook among American consumers. However, the decline in one-year inflation expectations suggests that concerns about price pressures may be easing.
- US Monetary Policy Expectations:
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- Market participants are now pricing in approximately 49 basis points of Federal Reserve rate cuts by the end of the year, as indicated by the December Fed Funds Futures contract. This expectation of looser US monetary policy could potentially weaken the US Dollar and provide some support for the Mexican Peso.
Technical Outlook on the USD/MXN
The USD/MXN currency pair is trending upward, approaching the psychologically significant 20.00 level. This price mark is particularly noteworthy because bullish movements have been consistently rejected at this level in recent trading sessions. The strong bullish momentum, as indicated by the rallying Relative Strength Index (RSI), suggests that buyers currently dominate the market and may be determined to break above the $20 threshold. Consequently, the short-term outlook for the pair remains positive, with further upside potential.
If the pair breaks above the 20.00 level, it could propel the USD/MXN toward its weekly high of 20.09. A sustained move beyond this point may target the year-to-date high of 20.22, followed by significant psychological resistance levels at 20.50 and 21.00.
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