How Mexican Elections Could Sway the Peso

Market analysts are keeping a close eye on Mexican presidential frontrunner Claudia Sheinbaum as her expected victory could affect the peso. Some fear a ruling party congressional supermajority might pressure the currency. While the peso has strengthened this year, recent political concerns have induced caution in financial markets.

While Mexican presidential frontrunner Claudia Sheinbaum is almost universally expected to clinch a win on Sunday, some market analysts and traders say that prospects of a ruling party congressional supermajority could be pressuring the peso.

The peso remains one of the top gainers against the U.S. dollar, having strengthened 13% since the end of 2022 due to the wide interest rate differential between the two countries. In April, the peso climbed to its strongest level since 2015. But in the past week, it has slipped 2% as the dollar strengthened globally and as investors await the electoral outcome.

"There's a feeling of caution in the market right now, there's always room for surprises," said Marco Oviedo, an analyst at XP Investments. "For (ruling party) MORENA to hold two-thirds of Congress, for example, would be very bad news (for the peso)." Polls show Sheinbaum leading the vote by a wide margin, causing some to speculate that her popularity could translate into congressional gains for her party and its allies.

A two-thirds majority would allow them to push through constitutional reforms pitched by current President Andres Manuel Lopez Obrador, including reforms in the energy sector that are unpopular with markets. However, the outcome will likely not be as drastic, according to a recent poll by consulting firm GEA/ISA. The leftist coalition will likely secure new seats, but not enough to reach a two-thirds majority, it showed.

Meanwhile, a survey published earlier this week by newspaper Reforma showed that less than half of voters would vote for a single party across federal, state and local elections. Even so, the concern has put pressure on the market. If the ruling party's congressional candidates prevail at the polls, the peso could rapidly depreciate by up to 5%, analysts at Barclays said.

On Thursday, the peso traded around 17.00 per dollar. "The market worry is that (a two-thirds majority) could open the door to reforms that are perhaps a bit more radical, and could drastically modify Mexico's institutional framework," said Erick Martinez from Barclays.

Outgoing President Lopez Obrador has pushed a laundry list of constitutional reforms, among them a pension overhaul and the election by the public of judges and members of the electoral authority. And while even more unlikely, a surprise victory by presidential candidate Xochitl Galvez, who represents a broad opposition coalition, could rock the peso even harder as Mexico would enter a period of political uncertainty.

But three days ahead of the vote, analysts agree that nothing is written in stone. "At the end of the day, we can't rule out any surprises," said Jacobo Rodriguez, analyst at Roga Capital. "Polls do sometimes fail, and I think that's precisely why investors are hedging their bets."