Peso Drops to 18.66 Amid Political Remarks, Volatility Concerns

Key Takeaway

• The Mexican peso fell to 18.66 per dollar amid political uncertainty and comments from president-elect Claudia Sheinbaum on judicial reforms.
• Senate Majority Leader Ricardo Monreal's reassurances initially strengthened the peso by 1%, but subsequent political remarks reversed gains.
• Peso volatility raises concerns for Mexico's central bank, potentially complicating monetary policy and inflation control efforts.

Peso Volatility Amid Political Uncertainty

The Mexican peso has been experiencing significant volatility, largely driven by political headlines and uncertainty surrounding upcoming reforms. The currency, which had been performing well, saw a sharp decline after comments from president-elect Claudia Sheinbaum. On Monday, the peso weakened to as low as 18.66 pesos per dollar, reflecting market concerns over potential constitutional changes.

Sheinbaum's remarks came shortly after Senate Majority Leader Ricardo Monreal indicated that the ruling Morena party would consider market reactions when discussing reforms. Monreal stated, "The market is an actor that plays a role and is present in our decisions," emphasizing the need for a balanced approach to avoid authoritarianism and undue power accumulation. Despite Monreal's reassurances, Sheinbaum's subsequent comments about prioritizing judicial reform sent the peso down again.

The peso had gained more than 15% against the dollar in the 24 months through May, outperforming major currencies. However, this strength has had mixed economic impacts. While a strong peso has been a point of pride for outgoing President Andres Manuel Lopez Obrador (AMLO), it has also affected the trade balance and the peso value of remittances. Exporters have expressed concerns over the currency's strength, although issues like crime, inflation, and climate remain more pressing.

Market Reactions to Reform Plans

The market's reaction to Sheinbaum's comments highlights the sensitivity of the peso to political developments. Sheinbaum, who will take office in October, has indicated that she will name her cabinet next week and does not believe that reform discussions will impact the peso. However, the market's response suggests otherwise.

Monreal's comments initially led to a 1% strengthening of the peso, as he assured that the ruling party would act cautiously and in coordination with Sheinbaum. He mentioned that the most controversial reforms would include judiciary, electoral, autonomous regulators, and energy reforms. While Sheinbaum has not yet prioritized these reforms, her campaign supported Lopez Obrador's initiatives, adding to market apprehensions.

Sheinbaum's approach to reforms will be crucial in determining the peso's trajectory. Monreal noted that Sheinbaum is "very sensible" and has instructed lawmakers to be cautious, aiming for a smooth transition process. The new congress will begin its legislative period on September 1, and the timeline for discussing and passing the bills remains uncertain.

Economic Implications and Central Bank Concerns

The rapid depreciation of the peso is likely to concern the central bank, given the risk of inflation pass-through. A weaker currency can act as an economic stimulus but may necessitate maintaining higher interest rates for longer to offset inflationary pressures. This dynamic could slow the pace of rate cuts, complicating the central bank's monetary policy.

AMLO has frequently highlighted the peso's strength as a measure of his administration's success. However, the recent volatility underscores the challenges of managing a currency in a politically charged environment. The central bank's sensitivity to peso weakening is rooted in the collective memory of past currency crises, such as the Tequila Crisis of the mid-1990s.

Management Quotes

• Claudia Sheinbaum, President-elect of Mexico:

  "Oh yes it would," (in response to Senate Majority Leader Ricardo Monreal's comments about judicial reform not necessarily being the first on the slate when congress resumes in September).

• Andres Manuel Lopez Obrador (AMLO), President of Mexico:

  "[The peso] had strengthened during his term."