The Mexican peso continues to depreciate against the US dollar

The Mexican peso broke through the 19.50 to the dollar barrier on Thursday, depreciating for a fourth consecutive day as the government’s judicial reform plan continues to weigh on the currency.

The peso closed at 19.28 per dollar on Wednesday, but fell as low as 19.52 per greenback on Thursday morning, according to Bloomberg data.

The currency later regained some of the lost ground, but by late afternoon the USD:MXN exchange rate was back at 19.52.

The rate represents a 4.5% depreciation of the peso from its closing position of 18.64 per U.S. dollar last Friday. The last time the peso was weaker was in late 2022.

The government’s proposed judicial reform — which aims to allow citizens to directly elect judges — contributed to the peso’s weakening this week.

The proposal, which critics say threatens the independence of the judiciary, could be approved as early as next month, when the ruling Morena party and its allies will have a supermajority in the lower house of Congress and a strong majority in the Senate.

If the law is approved, citizens will be able to elect Supreme Court justices and other judges from among candidates nominated by the sitting president, Congress and the judiciary itself. The first judicial elections are expected to take place next year.

Additional factors weighing on the peso on Thursday included the broader strengthening of the dollar and data showing that inflation eased in the first half of August.

Falling inflation and data showing that quarter-on-quarter economic growth slowed to just 0.2% between April and June have increased the likelihood that the Bank of Mexico (Banxico) will make a second straight interest rate cut after its monetary policy board meets on September 26.

The wide spread between the Banxico policy rate – currently 10.75% – and that of the US Federal Reserve (5.25%-5.5%) has supported the peso for a long period, but the unwinding of global carry trades and political developments in Mexico have hurt the currency in recent weeks.

Kimberley Sperrfechter, emerging markets economist at Capital Economics, said the decline in inflation to 5.16% in the first half of August, along with weak economic data for June and “confirmation from the Fed that it will start its easing cycle next month means we expect Banxico to cut its policy rate by a further 25bp to 10.50%.”

In addition to the release of inflation data, Mexico’s national statistics agency INEGI announced Thursday that monthly economic growth in June was 0%. Annual growth was 1.1%.

US Ambassador: ‘Direct election of judges poses a major risk’ to democracy

In a statement posted on social media Thursday afternoon, U.S. Ambassador to Mexico Ken Salazar stressed his opposition to the judicial reform proposal that President Andrés Manuel López Obrador sent to Congress in February.

“Based on my lifelong experience in favor of the rule of law, I believe that the direct and popular election of judges constitutes a major risk for the functioning of Mexican democracy,” he said.

“Any judicial reform should include adequate safeguards that will ensure that the judiciary is strengthened and not subject to the corruption of politics,” Salazar added.

The ambassador also said he believed that “the debate over the direct election of judges… as well as the fierce politics that would occur if the 2025 and 2027 elections for judges were to be approved, would threaten the historic commercial relationship we have built, which is based on investor confidence in Mexico’s legal framework.”

“Direct elections would also make it easier for cartels and other bad actors to take advantage of politically motivated and inexperienced judges,” Salazar said.

“We understand the importance of Mexico’s fight against judicial corruption. But the direct election of judges, in my view, would not solve the problem of judicial corruption or strengthen the government’s judicial power. It would also weaken efforts to make North American economic integration a reality and create turbulence as the debate over direct election continues in the coming years.”

Analyst: Approval of reform could ‘rapidly deteriorate’ business environment

Gabriela Siller, director of economic analysis at Banco Base, wrote on X that approval of the judicial reform proposal “could quickly deteriorate the business environment” in Mexico.

She also said that approving the reform could “lead the Mexican economy into a recession, as happened in 2019 after the cancellation of the construction of the (new) Mexico City airport.”

Siller said the reform will have a negative impact on economic growth by slowing down new flows of foreign direct investment as well as the reinvestment of profits from companies already present in Mexico.

“Given that the reform of the judiciary would weaken Mexico’s legal framework, the administration of justice and the application of USMCA rules in the country, it jeopardizes trade relations with the United States and would hinder new investments from that country,” she wrote.

Siller said earlier this week that approving the reform would “move Mexico away from the nearshoring opportunity.”

The reform of the judiciary could have an impact on Mexico of at least 1.9% of the GDP, by the brake on the announcement of new inversions and the brake on the reinversion of the uses of foreign companies that are in Mexico.

This is to summarize the dominant effect on others…

– Gabriela Siller Pagaza (@GabySillerP) August 22, 2024

Concern over the proposed reform is widespread and growing, including among court workers and judges, who began a strike this week.

New York investment bank Morgan Stanley lowered its investment outlook for Mexico earlier this week, issuing an “underweight” warning on Mexican stocks due to concerns over proposed judicial reform.

For its part, Bank of America described the reform as “very high risk” for the Mexican business sector.

US Banks ‘Misinformed’, Sheinbaum Says

President-elect Claudia Sheinbaum said Wednesday that Morgan Stanley and Bank of America were “misinformed” because approving the judicial reform will lead to “a better justice system in Mexico.”

Banks and other foreign companies and individuals with investments in Mexico have nothing to fear, Sheinbaum said, repeating a view she has expressed before.

She also rejected claims that the reform poses a threat to the USMCA, the North American free trade pact that replaced NAFTA in 2020.

Sheinbaum will take office on October 1, while newly elected lawmakers will take office in the House and Senate a month earlier.

The Morena-led coalition will be able to approve the judicial reform proposal and other constitutional bills without the support of opposition lawmakers in the lower house, as it will have a two-thirds majority. The votes of three opposition senators will be needed to pass these initiatives in the Senate.

With reporting from Aristegui Noticias, Reuters, El Financiero and FX Street