The Mexican peso staged a positive comeback on Wednesday, appreciating by 0.5% against the US dollar by 3:00 p.m. ET. This followed a sharp 1.9% decline on Tuesday, the steepest single-day drop in two months, triggered by market jitters over Mexico’s temporary suspension of diplomatic relations with the US and Canada. President Andrés Manuel López Obrador (AMLO) clarified in a press conference that the pause in relations only applied to the embassies of both countries in Mexico, aiming to reaffirm that diplomatic ties remain intact.
Despite the peso’s recovery, investors remain apprehensive about AMLO’s proposed judicial reform. This reform seeks to subject judges, magistrates, and ministers to popular elections, a move that critics argue could lead to the politicization of the judiciary and a rise in corruption. While AMLO dismissed concerns raised by US diplomats, emphasizing the importance of popular participation in democracy, the reform has created an uncertain investment climate in Mexico, as indicated by the Mexican Chamber of the Construction Industry (CMIC).
The peso has already experienced a significant depreciation, shedding 16% of its value against the dollar since late May, largely attributed to escalating domestic political risks. Mexico’s main stock market index has also witnessed a decline of nearly 10% during the same period. US-listed exchange-traded funds (ETFs) focused on Mexican equities exhibited mixed performance on Wednesday, with the iShares MSCI Mexico ETF EWW gaining 0.1%, while the Franklin FTSE Mexico ETF FLMX dipped 0.4%.
Last month, Fitch Ratings maintained Mexico’s sovereign credit rating at ‘BBB-‘ with a stable outlook. While acknowledging the potential negative impact of the judicial reform on Mexico’s institutional profile, Fitch indicated that it is premature to fully assess the severity of the changes until they are approved and implemented. AMLO plans to present the judicial reform to Congress for approval in September, the final month of his term. The MORENA coalition, currently holding a two-thirds majority in Congress, will have the power to push through constitutional reforms under the leadership of incoming President Claudia Sheinbaum. Investors continue to closely monitor the evolving situation and its potential impact on Mexican assets.
