Mexico: Peso sinks following MORENA election victory
The peso traded at MXN 18.34 per USD on 7 June, depreciating 8.0% month on month. This marked the weakest level since early 2023, and a reversal of the appreciatory trend that had prevailed for most of the past two years.
The large currency weakening is due to an increase in perceived political risk following the 2 June general elections, which saw the incumbent MORENA party clinch large majorities in both houses of Congress. These majorities could facilitate constitutional reforms that would harm the competitiveness of private firms, encode new spending obligations into law, and reduce the robustness of the country’s democracy. Outgoing President López Obrador—who will be replaced by President-elect Sheinbaum in October—recently said he would push for 20 changes to the constitution in light of the election results. These changes would include the elimination of some regulatory agencies, ensuring pension payouts are equal to workers’ full original salary, and electing judges by popular vote.
The peso is likely to remain weaker than its pre-election level through to the end of this year due to uncertainty about constitutional reform. Much will depend on the extent to which Sheinbaum distances herself from López Obrador once she takes office; in recent days, she has struck a more pragmatic tone than the current president, meeting with international financial organizations and stressing the importance of dialogue. In addition, the recent peso weakening—assuming it persists—will push up price pressures; this could cause Banxico to delay the start of its monetary easing cycle, in turn supporting the peso.
On the currency outlook, Goldman Sachs analysts said:
“Over the past few years of trend MXN appreciation, sharp unwinds like the one [following the election] typically reversed […] However, the higher degree of political uncertainty (both domestically and with the upcoming US election) means that this reversal may be a longer and more volatile process than before, as was the case in the aftermath of the 2018 election.”
On Congress, Itaú Unibanco analysts Andres Pérez M. and Julio Ruiz said:
“In 2018, AMLO brought a few opposition lawmakers over to his party, giving the ruling coalition a qualified majority in the Lower Chamber and coming very close to it in the Senate. We believe that Sheinbaum could use a similar strategy to achieve a qualified majority in both chambers. Besides the potential amendments to the constitution, the governing coalition will be able to easily pass secondary legislation reforms and budget proposals.”
On the policy direction, EIU analysts said:
“EIU continues to expect Ms Sheinbaum to be less populist and more pragmatic than her predecessor, Andrés Manuel López Obrador. However, a strong legislative position has raised the risk that Morena will pass controversial constitutional reforms, potentially to the detriment of the country’s business environment.”