Judicial reform takes next hurdle – Commerzbank

Mexico’s planned judicial reform continues to cause considerable volatility for the Peso. Earlier in the week the reform completed its first step through the parliamentary process, with a parliamentary committee approving the reform. At the same time, the US and Canadian ambassadors expressed their concerns about the reform. The response was quite harsh: relations with the ambassadors were ‘suspended’ for the time being. Neither of these developments did the Peso much good, Commerzbank’s FX analyst Michael Pfister notes.

Peso to benefit from reassuring statements in the short term

“Attempts were made yesterday to put the situation back on track. The outgoing Mexican president, Andrés Manuel López Obrador (AMLO), insisted that the suspension only concerned relations with the respective embassies and did not affect relations with the respective governments. At the same time, there were rumors that the president-elect, Claudia Sheinbaum, had asked that the judicial reform not be pushed through the parliamentary process in this way.”

“This would be a positive development, as it would indicate that policymakers are at least aware of the concerns of many market participants. The Peso could benefit somewhat as a result.We do not want to repeat here why we think the planned reform is problematic for the Peso. But we would still be cautious about taking such rumors at face value. Last week, Sheinbaum sought to allay market concerns about the reform.”

“And even before that, her statements tended to indicate that she too would like to see the reform through the parliamentary process as soon as possible. With this in mind, we could well see the Peso benefiting from reassuring statements in the short term, but we continue to see little upside potential for Mexico’s currency in the medium term.”