(Bloomberg) -- The Mexican peso led gains among major currencies Wednesday, boosted by global factors and as traders looked past the approval of a controversial overhaul of the nation’s judicial system that’s weighed on the nation’s assets.
The peso ended the New York session 1.4% stronger to 19.82 per dollar, the biggest jump this month, while a one-month measure of swings in the currency slipped to a three-week low. The text of a plan to overhaul the nation’s judiciary was approved early Wednesday in the Senate. The proposal, which sparked protests at home and a selloff in the nation’s assets, mandates all judges in the country must to be elected by popular vote, which critics say can erode checks on the ruling party.
Traders expected changes proposed by President Andres Manuel Lopez Obrador to pass swiftly as his Morena party is just short of the supermajority in the legislature needed for such constitutional amendments. The plan must now receive the backing of state legislatures — most of them controlled by Morena.
“Negative sentiment may have peaked” in the short term, Citi analysts including Ernesto Revilla wrote in a note. “While there is ample agreement on the negative impact of the reforms on the quality of democratic institutions, the market has had a harder time pricing its impact.”
Mexican assets have taken a beating since June, when the president’s party’s sweeping electoral victory took Wall Street by surprise. The vote marked the end of an era in which the currency’s relentless strength earned it the title of “super peso,” supported by record-high interest rates, absence of political uncertainty and the so-called nearshoring trend.
Since the June vote, traders have been laser-focused in September as the new congress is in session for the last weeks of AMLO’s term. His hand-picked successor Claudia Sheinbaum takes office next month.
US Factor
The peso’s slump in the past few months has also coincided with the unwinding of carry trades as well as volatility in currency markets ahead of the US presidential vote in November.
The upcoming election also came into play for the peso on Wednesday as traders moved to unwind bets linked to Donald Trump winning the White House after last night’s debate with rival Kamala Harris.
The peso is seen as vulnerable to Trump trade and immigration policies if he returns to office. The former president has threatened to carry out mass deportations and impose tariffs that could crimp Mexican exports and undermine a factory boom by companies that have been seeking to move closer to the world’s largest economy. An unexpected pickup in underlying US inflation also helped the currency, which benefits from a stronger US economy due to its close commercial ties.
“Today’s price action seems more anchored toward the perception that Harris won the debate and the US inflation print,” said Erick Martinez Magana, a strategist at Barclays in New York.
Next Steps
It could take some time for investors to fully parse out the economic impact from the court reform in Mexico. The overhaul will take years of implementation, with the first votes for half of the nation’s judges set for mid-2025. Investors will need to see how the bill will be implemented and how potential disputes will be handled under Mexico’s free trade deal with the US, said Graham Stock, a sovereign analyst at RBC Bluebay in London.
Lawmakers are discussing other bills that could be approved in AMLO’s final month in office before he cedes power to Sheinbaum in October. Finance Minister Rogelio Ramirez de la O has told investors that Sheinbaum will make the reform more palatable with secondary regulations.
“I don’t think we buy the fact,” Stock said before the Senate approval of the bill. “Unless there is some indication from the incoming government that they intend to respond to private sector concerns about the change, which seems unlikely still.”
--With assistance from Vinícius Andrade.
(Updates currency move in second paragraph.)
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