Mexican Peso sinks to four-week low as judicial reform spurs sell-off

• USD/MXN rises 0.20% to 19.97, hitting a four-week low of 20.14 amid ongoing political turmoil in Mexico.
• Judicial reform bill awaits Senate approval with potential consequences for US-Mexico relations and market sentiment.
• Mexico's upcoming inflation data and US NFP are key factors that could influence further Peso movement.

The Mexican Peso fell against the Greenback during the New York session, hitting a four-week low of 20.14. The financial markets continued to digest the lower house decision to approve President Andres Manuel Lopez Obrador's (AMLO) bill to make changes to the judicial system. The Peso extended its losses for the third straight day and finally cracked the psychological barrier of 20.00 as traders began to ditch the Mexican currency. The USD/MXN trades at 20.01, up 0.40%.

Mexico's economic docket is scarce with investors eyeing the release of automobile industry data on Friday. Next week, inflation figures will garner attention after the Bank of Mexico (Banxico) decided to lower borrowing costs despite revising their inflation projections upward.

Back to political developments, two-thirds of the Senate must now approve the judicial reform bill. Morena's ruling party is shy of one vote, but if the bill is cleared, it will be passed to 32 local congresses for their approval. Once the bill is approved in 17 of those states, the changes to the Mexican Constitution will be officially made.

On Tuesday, the US Ambassador in Mexico, Ken Salazar, expressed that the approval of the judiciary reform could damage relations between Mexico and the United States.

Across the border, the US docket has been busy releasing jobs and the ISM and S&P Global Services PMI data. The ADP National Employment Change for August was dismal with missed estimates and a downward revision of July's numbers.

Even though the Greenback weakened, it was a short-lived dip. Data released by the US Department of Labor showed that the number of Americans filing for unemployment benefits was lower than expected.

According to the CME FedWatch Tool, odds for a 50 bps Fed rate cut are at 39%; while for a quarter of a percentage point, 61%.

Now that most of the data is out of the way, traders will focus on the release of the August Nonfarm Payrolls (NFP) report.

Daily digest market movers: Mexican Peso extended its losses despite mixed US data

• Mexico's data revealed during the week show the economy is slowing due to higher interest rates set by the Bank of Mexico.
• Most banks expect the Bank of Mexico (Banxico) to reduce rates by at least 50 basis points (bps) for the remainder of 2024. This would pressure the Mexican currency, which has depreciated 17.38% year to date.
• US ADP Employment Change for August dipped from 111K to 99K, missing estimates of 145K. Contrarily, Initial Jobless Claims for the week ending August 31 slid from 232K to 227K, lower than the 230K expected.
• ISM Services PMI for August was better than projections, increasing by 51.5 from 51.4 in July, above the consensus for a 51.1 drop.
• US Nonfarm Payrolls in August are expected to grow from 114K to 163K, while the Unemployment Rate is foreseen ticking lower from 4.3% to 4.2%.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 104 basis points this year, up from a day ago's 103 bps, according to the fed funds rate futures contract for December 2024.

Technical outlook:  Mexican Peso weakens as USD/MXN rallies above 20.00

Politics is the driver of the USD/MXN exchange rate. As traders digested the lower house approval of the bill, foreign investors had grown worried about changes to the Mexican Constitution.

Therefore, the USD/MXN cleared the 20.00 psychological barrier as buying momentum began to build as seen on the Relative Strength Index (RSI). The RSI registered a new peak, and if the uptrend gains steam, it will exert additional pressure on the Peso.

If USD/MXN clears the YTD high at 20.22, the next stop would be the September 28, 2022, daily high at 20.57. If those two levels are surrendered, the next stop would be August 2, 2022 swing high at 20.82, ahead of 21.00.

Conversely, if USD/MXN weakens further, the first support would be 19.50. A breach of the latter will expose the August 23 swing low of 19.02 before giving way for sellers eyeing a test of the 50-day Simple Moving Average (SMA) at 18.65.