Mexican peso tumbles 4% after Mexico's historic election

Data current as of 6/3/2024

Key points

• Mexico’s biggest election leads to supermajority: (0:29)
• USD/MXN hit 17.7000 as results came in: (1:10)
• Morena reforms could spook outside investors: (2:10)
• MXN carry strength could provide support: (3:41)
• Last election led to a stronger peso: (4:40)
• Where is USD/MXN headed?: (6:07)

Mexico’s biggest election leads to supermajority

In the largest election in Mexico's history, Claudia Sheinbaum of the incumbent Morena party secured the presidency to become Mexico's first female president. Sheinbaum is the mentee and chosen successor of the incumbent President Andrés Manuel López Obrado (AMLO). Morena's victories continued with a dominant performance in the congressional elections, likely obtaining a surprising supermajority to accompany the presidency. This consolidation of power and political alignment in Mexico's government enhances the possibility of sweeping reforms that could reshape Mexico's economic landscape.

USD/MXN hit 17.7000 as results came in

The Mexican peso experienced a sharp fall as the election results unfolded, causing USD/MXN to gain 4% throughout the morning, trading as high as 17.700. This price action accelerated after the concession of the presidency by Galvez around 3 a.m. EST and continued as congressional results trickled in. This rapid depreciation and flight-to-quality reflects investor concerns about the potential for radical policy shifts under the new administration.

Morena reforms could spook outside investors

With Morena's strengthened legislative control, significant policy changes are more plausible, potentially unsettling for foreign investors and impacting Mexico's relations with the US. The peso has increasingly benefited from Mexico's geographic proximity to the US, especially due to the growing trend of nearshoring. This movement has led US companies to boost investments in Mexican factories, taking advantage of lower transportation costs. According to COMTRADE (2023), this shift has made Mexico the top import source for the US at 16%, surpassing China at 15%. If Morena's policies destabilize Mexican institutions or alter economic incentives, sudden and radical shifts may deter business investments, thus jeopardizing the peso's stability.

MXN carry strength could provide support

Despite political uncertainties, Mexico’s higher interest rates compared to the US provide a carry trade advantage that could support the peso. This rate differential, nearly 5% higher in Mexico, presents a potentially profitable scenario for currency traders holding MXN and selling USD, adding a layer of support for the peso amidst market volatility.

Last election led to a stronger peso

Reflecting on the last electoral cycle in 2018, the peso weakened in anticipation but gained strength following the election, indicating that market reactions may vary and stabilize over time. As investors and markets adjust to the new political reality and the potential outcomes, the peso might again experience significant fluctuations before finding a new equilibrium.

Where is USD/MXN headed?

The future trajectory of USD/MXN remains uncertain, with potential for both appreciation and depreciation influenced by the unfolding economic policies of the new administration. The historical appreciation of the peso under Morena’s leadership suggests possible positive outcomes, but with full governmental control, the impacts could differ, underscoring a critical period of observation and adaptation for traders and economists alike. Over the past decade, USD/MXN has historical precedent to rise further (25.0000 in 2020) or revert lower (13.000 in 2014).

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