Peso Tumbles Further After Leftist President-Elect Sheinbaum Confirms Drastic Reform

In a Monday press conference she previewed plans to put her cabinet in place, after which she confirmed that the "constitutional reform of the judiciary would be among the first reforms to be approved

By Tyler Durden

The Mexican Peso has continued falling against the dollar on news that the country's leftist President-elect Claudia Sheinbaum has committed to pushing through deeply controversial reforms of the judiciary widely seen as negative for Mexico's efforts to create an attractive and prosperous business climate.

In a Monday press conference she previewed plans to put her cabinet in place, after which she confirmed that the "constitutional reform of the judiciary would be among the first reforms to be approved." A fundamental change is that that federal judges will get elected by popular vote, instead of appointment.

The reform is not merely a future election plan when judge's terms are up, but would replace an appointed Supreme Court with popularly elected judges, and would apply to some lower courts.

The reforms require amendments to the constitution, something easily attainable for Sheinbaum's Morena party given it holds a supermajority in both houses of Mexico's Congress.

As Sheinbaum spoke Monday, the peso tumbled by nearly 2% to around 18.55 per US dollar in international trading, reaching a 14-month low, extending the ongoing decline since her June 3rd election victory. The peso has depreciated more than 9% since election day.

Sheinbaum also announced that the Biden White House has sent a delegation to welcome her into the country's top office, and an initial meeting will be held Wednesday.

But current President Andrés Manuel López Obrador doesn't actually step down until Oct. 1, and with Morena's supermajority in Congress, López Obrador might fast-track the judicial reform, a further big unknown making investors nervous. 

Bloomberg writes "MXN is down 1% and again among the worst performing major currencies in the word Tuesday, adding to recent losses that made it the second quarter’s biggest decliner."

AFP observes, "Congress is expected to convene on September 1, potentially giving Lopez Obrador a one-month window to push through reforms before retiring." Below is more via a Bloomberg note:

• Sheinbaum’s comments added to concern that Mexico’s government will face weakened checks and balances on its power, opening the way for market unfriendly measures

• Broad flight-to-quality move is also weighing on the peso Tuesday; most major currencies are depreciating against the dollar while US treasury yields decline 2-3 basis points, a move that is also reflected in TIIE swaps

• S&P futures are down 0.5%, while most stock indexes in Europe are facing an even bigger decline; declines in oil and copper are also set to contribute to negative sentiment in Latin America

• The Mexican peso is likely to keep rewarding traders holding short-maturing options, and punishing those eager to fade the move in implied volatility

Sheinbaum on Monday in responding to a reporter's question said she did not believe her reform program would significantly weaken the peso or impact financial markets.

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