The Mexican Peso strengthened by 1.7% in the month of May, but the currency could face an immediate challenge to this appreciation in the form of political risk.
President Andres Manuel Lopez Obrador is hoping that a typically challenging mid-term elections cycle in the past for the established order instead turns out in his favor to further consolidate his ability to enact his agenda for the Mexican economy. This coming weekend, his ruling coalition could solidify its supermajority in the lower house of congress.
AMLO’s political party, Morena, had been thought to be vulnerable to losing seats and allies, yet most recent polling shows that the possibility of AMLO being dissatisfied is lower than most expect. His coalition has nearly a 2-1 advantage over the opposition according to polls. So what could this mean economically?
The outside perspective is that AMLO’s plans to reform the Constitution and accommodate energy policy to his liking will upset oil markets. AMLO has shown little regard in his reign for international interests and claims to have the people’s mandate to remake the economic structures.
The populist sentiment has garnered criticism from the likes of publications like Britain’s The Economist which accused him of having dictatorial tendencies threatening a major Latin-American democracy. Naturally, things such as credit ratings and economic outlooks could take a hit as his agenda is perceived as intrusive to free commerce.
Petro-currencies such as MXN can be highly volatile for the remainder of the year as we gauge whether the high expectations for the global recovery narrative materialize. Oil demand is said per OPEC+ not to be affected by the productivity from Iran as sanctions against the Islamic Republic are lifted in hopes of nuclear deal negotiations improving. This uncertainty in energy coupled with the potential for intervention in Mexico’s key market is making investors and traders nervous.
If the elections do surprise, expect Morena leadership to be questioned by the President and perhaps the chances of no changes down the line will give MXN merit to rise in value. However, if things go according to the polls, AMLO gets to exercise his will, which at the moment looks like it could establish Peso in levels witnessed at the start of March. Expect heavy swings as we close the week.
In our view, anything could happen going forward since inflationary pressures and lack of guidance for the buck could result in a mixed direction even as next week we digest the results and consequences.
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