Mexican peso falls as judicial review clears first hurdle – BNN Bloomberg

(Bloomberg) — Mexico’s peso suffered the biggest losses among major currencies on Tuesday after a key congressional committee approved President Andrés Manuel López Obrador’s full plan to overhaul the country’s judiciary, a move investors see as a threat to the rule of law in the Latin American nation.

Traders have been betting that the changes — which include a requirement that all federal judges be elected by popular vote rather than appointed — would pass since AMLO’s Morena party won legislative elections in a landslide in June. Still, some were surprised at how quickly the text was approved at the committee level.

The peso fell 1.8% to 19.76 per dollar on Tuesday, the currency’s worst day since June 7.

“There was still disbelief,” said Marco Oviedo, a strategist at XP Investimentos in Sao Paulo. “The expectation was that there could have been some dilution, but that didn’t happen.”

While AMLO’s Morena party says the new rules are aimed at rooting out corruption in the system, critics say they will undermine the independence of the judiciary and undermine the ruling party’s checks on power. Judicial workers launched nationwide strikes last week against the proposal, while U.S. Ambassador Ken Salazar warned it would pose a “grave risk” to democracy and make it easier for drug cartels to infiltrate the judiciary.

AMLO said Tuesday he had put “on hold” his relations with Salazar and the Canadian ambassador, who last week raised investor concerns about the reform, in the wake of their comments. He later clarified that the pause applies to relations with each embassy, ​​not the U.S. or Canadian governments, and that he will not ask Salazar to leave the country.

“Pausing means we are going to give each other our time,” he said of Salazar during his morning press conference, adding that officials “must learn to respect Mexico’s sovereignty.”

Debate in the lower house could begin as early as next week, when the new Congress takes office. It would need to be approved by a two-thirds majority in both houses.

The plan is a priority for AMLO, who hands over the reins to his hand-picked successor, Claudia Sheinbaum, in October. The final weeks of his six-year term overlap with the June election of Congress, when his party’s landslide victory spooked investors after it nearly secured a supermajority in the legislature.

“There are concerns about the deterioration of institutions,” said Erick Martinez Magana, a strategist at Barclays Plc. “The noise will continue over the next few weeks, but we expect it to eventually come back in line with global macro fundamentals.”

Tuesday’s decline is the latest in what has become a downward spiral for the peso, which has fallen more than 13% against the greenback since the vote. The massive unwinding of so-called carry trades and uncertainty over the U.S. presidential election are also hurting the currency, causing a measure of implied volatility to double to 18.1% since April.

It was a dramatic turnaround for the peso, whose relentless strength in recent years had discouraged traders from betting against it. Record-high interest rates in Mexico, fiscal prudence and the absence of political noise had propelled the currency to multi-year highs.

Analysts now say it’s time to dump Mexican assets. Morgan Stanley downgraded the country’s stock to underweight this month, citing the reforms. Strategists at Citigroup and Goldman Sachs closed bullish calls on the currency last week, with Goldman saying there’s no near-term catalyst for the peso.

“The peso needs to be repriced to a level that takes into account some of the risks posed by the current political situation,” said Luis Estrada, an analyst at RBC in Toronto.

(Updates with market movement in the third paragraph)

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