Mexican Peso Tumbles as Ruling Party Vows to Pass Reforms

(Bloomberg) -- Mexico’s peso sank after the leader of the ruling party in the lower house said lawmakers would seek to pass a swath of reforms proposed by President Andres Manuel Lopez Obrador that could remove checks on the government’s power.

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Ignacio Mier, the leader of the ruling party in the lower house, said lawmakers will start discussions aiming to vote on the reforms when the new congress is seated in September, according to a video shared on X.

The prospect of an overhaul of the country’s institutions before President elect-Claudia Sheinbaum takes office in October sent the peso tumbling near 3% to 18 per dollar, by far the worst performer among majors and on track to close at its weakest since October. A gauge of the currency’s one-month implied volatility also jumped after the post, reaching 14.8%.

“Volatility is going to be here to stay,” said Brad Bechtel, global head of FX at Jefferies in New York. “It could be a wild time in the MXN for a while.”

AMLO’s Morena party and its allies won the Sunday elections in a landslide, getting more than two-thirds of the lower house of congress and falling slightly short of that in the Senate. The outcome surprised investors, who are concerned about proposed reforms that could increase state meddling on the economy and remove checks on the ruling party’s power.

The result sent shockwaves across Mexican assets, with money managers rushing to cut their exposure to the peso. The post-vote reaction was likely exacerbated by a wave of stop-losses, given the currency was over-owned by speculative traders, Macquarie strategists wrote earlier this week.

The currency, which had become a favorite of carry traders, has shed more than 5% in the wake of the election, by far the worst performer among emerging markets in the span. Just a week before the election, the peso had been the best performing currency in the world.

Juan Perez, director of trading at Monex USA, said the push to pass Lopez Obrador’s stated list of reforms was also raising concerns the ruling party could take even more radical steps.

“The desire to go hard at reforms this way is a sign that perhaps Morena will push for items, enjoying the lack of checks and balances from opposition, to deviate from business interests that have helped in propping up what was the Super Peso effect,” he said.

Miguel Iturribarria, a strategist at BBVA Mexico, said the most concerning reforms for investors include a bill to replace the current Supreme Court with elected justices, overhaul electoral laws and eliminate autonomous regulators

“It concentrates a lot of power in the government,” Iturribarria said. “As a result we should have an increase in the premium for local assets.”

--With assistance from Zijia Song and Maria Elena Vizcaino.

(Adds details, updates prices starting in second paragraph)

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