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The Dollar remains in the maximum zone against the Mexican Peso after Claudia Sheinbaum confirms her commitment to judicial reform

  • USD/MXN remains above 18.20 this Tuesday.
  • The US dollar hits four-and-a-half-week highs.
  • Mexico’s industrial production offers mixed results in April.

After reaching a fourteen-month high of 18.65 yesterday, Monday, the USD/MXN is trading today between a daily low of 18.20 and a high of 18.58. At the time of writing, the pair is trading above 18.43, gaining 1.06% on the day.

The Mexican Peso remains weak after Sheinbaum confirms that he will continue with judicial reforms

Claudia Sheinbaum, president-elect of Mexico, held a press conference late on Monday in which she confirmed that she will continue with the reforms of the judicial branch, which has contributed to maintaining the weakness of the Mexican peso.

Sheinbaum declared that “the constitutional reform of the judiciary would be among the first reforms to be approved.” When asked if this would weaken the Mexican peso, Sheinbaum said he did not believe it would impact financial markets. Other reforms that the president-elect said she would prioritize were social benefits.

The reform of the judicial branch seeks to replace the current system, in which Supreme Court judges are appointed, with judges elected by popular vote. The policy also covers heads of bar associations, law schools and some lower court judges. The reforms arise from criticism of the current system which, it is argued, allows corruption and cronyism.

To be approved, amendments to the constitution are required, for which a supermajority in both chambers (more than two-thirds of the seats) is necessary. Unlike AMLO, Sheinbaum’s coalition has a supermajority in Congress and is only missing two seats in the Senate.

In his press conference, Sheinbaum also said that he would meet with a delegation sent by US President Joe Biden on Wednesday.

On the other hand, Mexico today published its industrial production data for April. The indicator has fallen 0.5% monthly in April compared to the expected increase of 0.3%, while the annual one has increased 5.1%, exceeding the estimated 4.4%.

US Dollar rises to near five-week highs ahead of US CPI and Fed

The Dollar Index (DXY) rose this Tuesday to 105.46, its highest level since May 9. The market is betting on the Fed to only make one interest rate cut this year, which is driving the US dollar higher.

Tomorrow, Wednesday, the US inflation for May will be published, which is expected to remain at 3.4% annually in the headline index and to have moderated to 3.5% from the previous 3.6% in the core figure. Subsequently, the Fed will make its monetary policy decision, with interest rates expected to remain unchanged at 5.5%.

USD/MXN Price Levels

The USD/MXN appears bullish in the medium and short term. An increase this Tuesday could take the pair to the initial resistance located at 18.65, yesterday’s high, before heading towards the psychological barrier of 19.00. Higher awaits the March 2023 ceiling at 19.23.

On the downside, the main support is in the 18.00 region, where there is a round level coinciding with the 100 moving average. Further down, the area around 17.50 would serve as a key level before 17.00.

The US Dollar FAQs

The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.

The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.

In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.

Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.

Source: Fx Street

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