Mexican Peso stabilizes after falling to new 2024 low

• The Mexican Peso is pausing after declining to a new low for the year. 
• The Peso fell on investors' concerns regarding the Mexican government's proposed controversial reforms to the judiciary. 
• USD/MXN will be in focus on Friday as critical US Nonfarm Payrolls data will probably impact all US Dollar pairs.

The Mexican Peso (MXN) trades a touch lower in its key pairs on Friday, stabilizing after a volatile 24-hours in which the currency hit new year-to-date (YTD) lows only to bottom out and recover. Investor concerns over controversial new reforms to the way judges are elected were the main cause of the Peso's sharp sell-off. 

On Friday, traders will turn their attention north of the border as the much-anticipated US Bureau of Labor Statistics' Nonfarm Payrolls (NFP) report for August is scheduled for release at 12:30 GMT. The data could impact expectations for interest rates in the US and the value of the US Dollar (USD), suggesting USD/MXN is likely to experience yet more volatility.  

Mexican Peso-US Dollar pair in the spotlight

The Mexican Peso and US Dollar pair is likely to be in focus on Friday ahead of crucial NFP data from the US. The US Federal Reserve (Fed) has stated it is now more concerned about risks to the US labor market than inflation, and further signs of weakness could prompt it to lower interest rates more aggressively than anticipated. This, in turn, could weaken the US Dollar since lower interest rates generally make a currency less attractive to investors who favor higher returns. 

Economists are expecting the NFP data to show that the American economy added 160K new hires in August, however, if the data comes out weaker than this estimate - which is itself lower than the average for August - it could sound alarm bells for the economy. This, in turn, will increase the chances of the Fed slashing interest rates by  0.50% at their September 18 meeting - double the standard 0.25%. 

Another key metric in the report is the Unemployment Rate, which is slated to fall to 4.2% from 4.3%. However, if it fails to, or even rises, then this too could put pressure on the Fed to cut rates more swiftly than they had expected,

A half percent cut in the fed funds rate would bring the Fed's base rate down to a range between 4.75% and 5.00%. The anticipation of such a move would lead to a fall in USD/MXN. Currently, market-based probabilities for a 0.50% cut at the September meeting are around 40%, however, if the jobs data on Friday is particularly weak, those chances could surge, leading to a fall in USD/MXN, all other things being equal.

In Mexico, the data will be confined to Auto Export and Production in August.  July's figures showed Exports falling 1.6% and production rising 2.7%. 

At the time of writing, one US Dollar (USD) buys 19.94 Mexican Pesos, EUR/MXN trades at 22.16, and GBP/MXN at 26.29.

Mexican Peso under pressure on the back of political reforms

The Mexican Peso is in an established downtrend in most pairs, however, ever since the government sought to push through a controversial bill of reforms to the judiciary. 

The reforms seek to counter the perceived corruption in the judiciary by electing judges through popular vote rather than by appointment. However, critics argue the bill will compromise the independence of judges and fail to combat corruption, which is more located among lower-ranking officials and members of law enforcement agencies.  

On Wednesday, the government succeeded in passing the bill, winning the vote by 357 in favour versus 130 against. 

The reforms will now be debated in Mexico's upper house, where the government is one seat short of the two-thirds majority it needs to get the bill passed. Most experts believe, however, that it will still get voted through. 

After that, it still needs to 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," says Christian Borjan Valencia, analyst at FXStreet. 

From a financial perspective, the reforms run the risk of leading to a decline in foreign investment. This, in turn, would reduce demand for the Peso, leading to a further depreciation of the currency. 

The US ambassador for Mexico, Ken Salazar, said that although reforms to the judiciary were needed, he was against the current bill, which was raising concerns among investors in the US. He warned that it could jeopardize the two countries' close relationship, which includes a free trade deal. 

"If it is not done in the right way, it could cause a lot of damage to the relationship," said Salazar at a press conference on Tuesday.

Technical Analysis: USD/MXN makes new YTD high of 20.15

USD/MXN broke to new 2024 highs on Thursday, reaching a peak of 20.15 before falling back to close near its opening price. In the process, the price formed a technical set-up called a bearish Shooting Star Japanese candlestick (shaded rectangle on the chart below). 

This pattern occurs at market tops when the price moves to a peak and then rolls over all in the same day. It can be evidence of the start of a pullback, correction, or even, in some cases, a reversal of the bull trend. If the following day is also bearish, it provides added bearish confirmation to the Shooting Star. However, until Friday's close, that will not be known.  

USD/MXN Daily Chart 

Another quite bearish sign is that the Relative Strength Index (RSI) momentum indicator is diverging with price when compared to the August 5 peak. At the September 5 peak, the RSI was lower than it was on Thursday, even though the price made a higher high. The non-confirmation from RSI suggests a lack of bullish momentum accompanying the September peak, which could be indicative of underlying weakness.  Again, it suggests the risk of a pullback evolving. 

Despite these bearish signs, however, the overall trend remains bullish, and since according to technical analysis theory "the trend is your friend," this favors more upside. As such, any weakness may be temporary before the pair rallies again.

A break above the high of the Shooting Star at 20.15 would provide added confirmation of a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.