Peso Weakens Amid Mexico's Urgent Judicial Reform Push

Key Takeaway

• The Mexican peso fell 1.2% against the US dollar amid President AMLO's push for urgent judicial reform, raising investor concerns.
• Morgan Stanley forecasts further peso weakening to 19.20 per USD by Q2 2025, citing insufficient risk premium pricing.
• US business officials worry that proposed reforms, including electing Supreme Court justices, could harm Mexico's investment climate.

Peso Weakens Amid Judicial Reform Push

The Mexican peso experienced a notable decline on Tuesday, falling 1.2% against the US dollar as of 3:40 p.m. in New York. This drop comes in the wake of President Andres Manuel Lopez Obrador's (AMLO) renewed emphasis on the urgency of a judicial reform, which critics argue could undermine checks on the ruling party. The currency's performance lagged behind all other emerging-market peers.

AMLO described the constitutional change as "urgent" and suggested it could be approved before his term ends on September 30. He emphasized the importance of true rule of law, stating, "This is about having true rule of law, which is what the investors want, not the speculators. True businessmen want true rule of law." He further added, "Do you think so there isn’t nervousness in financial markets I’m going to be an accomplice to corruption in the judicial power? That we are all going to be accomplices?"

The peso, which had been one of the best-performing currencies globally, has been on a downward trend since President-elect Claudia Sheinbaum's landslide victory on June 2. Her Morena party's stronger-than-expected performance in Congress has fueled concerns that lawmakers might push through AMLO's package of reforms before she takes office in October.

Market Reactions and Analyst Views

Morgan Stanley had previously forecasted that the peso could weaken to 19.20 per US dollar by the second quarter of 2025 under its most pessimistic scenario. Strategist Ioana Zamfir noted, "We do not believe that MXN is pricing in enough risk premium for the potential deterioration ahead." She suggested buying USD/MXN on dips below 18.00, as the currency is expected to remain the main release valve for political noise.

The peso recently broke past the 18.50 per dollar level, with its one-month implied volatility nearing the highest levels since November 2020. Zamfir pointed out that the currency no longer offers the most compelling emerging-market yield after adjusting for volatility.

In his daily press conference, AMLO highlighted that the peso had strengthened during his tenure, unlike under previous presidents, and assured that Mexico's public finances were in good condition. He also met with Sheinbaum to discuss their transition plan, which left investors anxious for more details about the timeline for the proposed reform.

Business Community Concerns

At a closed-door meeting at the US Chamber of Commerce in Washington last Friday, US business officials expressed concerns about some of the plans by Lopez Obrador and Sheinbaum, such as the reform to make Supreme Court justices elected rather than appointed. They feared these changes could negatively impact the investment climate in Mexico. The Chamber, the largest US business lobbying group, is seeking to arrange a meeting between chief executives from both countries and Sheinbaum during a conference in Mexico City in September, just weeks before her inauguration.

Sheinbaum has indicated that the judicial reform would be among the first legislative projects to be discussed in Congress. She emphasized the need for a wide discussion involving law schools, bar associations, and judiciary workers. "There should be a wide discussion in the months before the new congress begins," she said.

Street Views

• Ioana Zamfir, Morgan Stanley (Bearish on the Mexican peso):

  "We do not believe that MXN is pricing in enough risk premium for the potential deterioration ahead. We would look to buy USD/MXN on dips below 18.00, as the currency should remain the main release valve for political noise."

Management Quotes

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

  "This is about having true rule of law, which is what the investors want, not the speculators. True businessmen want true rule of law."
  "Do you think so there isn’t nervousness in financial markets I’m going to be an accomplice to corruption in the judicial power? That we are all going to be accomplices?"

• Claudia Sheinbaum, President-elect of Mexico:

  "[The changes could] build a better judicial system."