Mexican Peso Sinks as Judicial Overhaul Clears First Hurdle

Maria Elena Vizcaino and Alex Vasquez
3 min read
11

(Bloomberg) -- The Mexican peso led losses among major peers Tuesday after a key congressional committee approved President Andres Manuel Lopez Obrador’s full plan to overhaul the nation’s judiciary, a change investors see as a threat to the rule of law in the Latin American country.

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Traders have been betting the changes — which include requiring that all federal judges are elected by popular vote, rather than appointed — will pass since AMLO’s Morena party won legislative elections in a landslide in June. Yet how quickly the text was approved at the committee level caught some by surprise.

The peso slid 1.8% to 19.76 per dollar on Tuesday, the currency’s worst day since June 7.

“There was still some disbelief,” said Marco Oviedo, a strategist at XP Investimentos in Sao Paulo. “The expectation is that there could have been some watering down and that didn’t happen.”

While AMLO’s Morena party says the new rules are meant to root out corruption in the system, critics argue it will undermine judicial independence and erode checks on the ruling party’s power. Judicial workers launched nationwide strikes against the proposal last week, while US Ambassador Ken Salazar warned that it would pose a “major risk” to democracy and make it easier for drug cartels to infiltrate the judiciary.

AMLO said Tuesday he had put his relationships with Salazar and Canada’s ambassador, who raised investor concerns about the reform last week, “on pause” in the wake of their comments. He later clarified that the pause is in relations with each embassy, not with the US or Canadian governments, and that he will not ask Salazar to leave the country.

“Pausing means that we are going to give each other our time,” he said of Salazar during his morning news conference, adding that the officials “have to learn to respect Mexico’s sovereignty.”

The lower house debate may kick off as early as next week, when the new congress takes office. It would have to be approved by a two-thirds majority in both chambers.

The plan is a priority for AMLO, who will be handing the reins to his hand-picked successor Claudia Sheinbaum in October. The final weeks of his six-year term overlap with the congress elected in June, when his party’s overwhelming victory spooked investors as it nearly clenched a supermajority in the legislative.

“There’s concerns over the deterioration of institutions,” said Erick Martinez Magana, a strategist at Barclays Plc. “The noise will continue in the coming weeks but at the end we expect it to trade back in line with global macro fundamentals.”

Tuesday’s decline is the latest of what has become a tailspin for the peso, which has lost more than 13% versus the greenback since the vote. The massive unwinding of so-called carry trades and uncertainty over the US presidential vote are also hitting the currency, making a measure of its implied volatility double to 18.1% since April.

It’s been a radical turnaround for the peso, whose relentless strength in the last few years deterred traders from betting against it. Record-high interest rates in Mexico, fiscal prudence and the absence of political noise had propelled the currency to multi-year highs.

Now, analysts are saying it’s time to ditch Mexican assets. Morgan Stanley downgraded the nation’s equities to underweight this month, citing the reforms. Strategists at Citigroup and Goldman Sachs closed bullish calls on the currency in the past week, with Goldman saying there’s no near-term catalyst for the peso.

The peso “needs to reprice to a level that incorporates a set of risks that the current political situation calls for,” said Luis Estrada, an analyst at RBC in Toronto.

(Updates with market move in third paragraph)

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