Mexican peso extends losses, but stocks gain after post-election selloff

By Anthony Harrup

MEXICO CITY - The selloff in the Mexican peso in the wake of the ruling party's overwhelming election victory continued at a slower pace Tuesday, and stocks recovered some of the ground lost in the wake of the vote.

The ruling Morena party's presidential candidate Claudia Sheinbaum, a close ally of President Andrés Manuel López Obrador, won Sunday's presidential vote by around a 30-point margin over her nearest rival and is due to take office on Oct. 1.

A clear win by Sheinbaum was expected, but the peso and stocks suffered their sharpest declines since 2020 on Monday as Morena also secured a two-thirds majority in the lower house of Congress and appeared set to come within a few seats of a qualified majority in the Senate. That would allow the party to pass controversial constitutional changes in areas such as energy, the judiciary and the electoral system even before López Obrador leaves office at the end of September.

The peso (USDMXN) fell 4% on Monday, and weakened a further 1% Tuesday to 17.86 against the U.S. dollar. The stock market's benchmark IPC index MX:IPC rose 3.2% after a 6.1% drop the previous day.

The peso, which in April was at its strongest level in almost a decade, was already among the most expensive of the emerging market currencies, said Carlos de Sousa, emerging markets strategist at investment management firm Vontobel.

"The fact that it reacted so strongly is because there were so many long positions, and a lot of these investors are hedge funds or fast money, so it's not particularly surprising to see the price reaction," he said.

López Obrador, who submitted constitutional proposals in February that are seen as unfriendly to markets, said Monday that he would consult with Sheinbaum on those initiatives.

"I don't want to impose anything," he said.

The fact the ruling party will have a supermajority in congress, or close to it, is likely to keep investors from piling back into the peso trade, said Brad Bechtel, global head of FX at Jefferies.

"A lot will depend on getting more clarity on what [the] new administration is angling for," he said.

The peso has been supported by high interest rates, the economic prospects from nearshoring, and a pragmatic central bank, Bechtel said.

"There are a lot of positives in the macro story and people were long the peso for a variety of reasons. Now you just have the underlying nervousness in the market," he added.

Finance Minister Rogelio Ramírez de la O said Tuesday that he would stay on under the next administration for an indefinite period.

In a brief message to investors, Ramírez de la O said the next government is committed to lowering budget deficits, maintaining macroeconomic stability and fiscal prudence, and respecting central bank autonomy. He made no mention of the constitutional initiatives.

"I don't think the worries are that much on the fiscal side, but more on the institutional side," de Sousa said.

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06-04-24 1950ET

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