2024 Mexico Presidential Election - Trading The MXN

During the administration of AMLO, a general respect towards the private sector and institutions has been observed, which has contributed to a perception of political stability. This perception is reflected in the expectations of continuity of the left party as Mexicans head to the polls.

Expectations

Claudia Sheinbaum, the candidate of the Morena party and current Mayor of Mexico City, leads the polls with a significant advantage over her competitors.

Opinion Polling

This expectation of political continuity has led markets to remain primarily focused on the traditional economic factors that influence the value of the Mexican peso. Given the mitigation of political risks since AMLO came to power and the expectation of continuity from Morena, markets are not discounting a significant political risk premium for the Mexican peso ahead of the presidential elections.

Interest Rate Differentials

One of the pillars of the strength of the Mexican peso has been its attractive interest rate differential. The Bank of Mexico (Banxico) has maintained a prudent monetary policy, especially in a context of rising inflation. Recently, inflation has shown signs of an increase, leading Banxico to proceed with caution regarding future rate cuts, trying to limit expectations that these adjustments will be considered a normalization cycle.

At the moment, the main expectation is that these interest rate differentials will continue to support the Mexican peso in the near future, as investors seek to take advantage of these returns.

AMLO Administration

During the AMLO administration, despite some initial conflicts with the private sector, the economy has maintained a level of relative stability. The reforms and policies implemented have not been as radical as initially feared, allowing for a more harmonious coexistence between the government and the private sector. This has contributed to a perception of lower political risk, reflected in the stability of the Mexican peso in international markets.

2024 Presidential Elections

The outlook for the 2024 elections is that Morena will maintain power, either with a simple majority or potentially a majority in Congress. This expectation of continuity has allowed markets to focus on fundamental economic factors rather than political uncertainties. Analysts expect that the Sheinbaum administration, if elected, will continue with economic policies that have been relatively favorable for the market.

Potential Outcomes

Although Sheinbaum leads by a wide margin, there is a possibility that the margin will be narrower than indicated by the polls. This could result in a more robust system of checks and balances in Congress. In any case, the prevailing expectation is that Morena will maintain a strong position, which should translate into political stability and continuity.

Long-Term Risks

In the long term, one of the main risks to the economy and the Mexican peso is the possible return of Donald Trump to the presidency of the United States. A Trump administration could harden bilateral relations, negatively impacting the Mexican economy. In the context of global fragmentation, some Chinese companies have begun or expanded operations in Mexico to take advantage of its proximity to the US market. If this trend continues, it could have an unfavorable effect on the economy and the Mexican peso, as the Republican candidate seeks to limit China's economic advances.

"Friendshoring" and "Nearshoring" Dynamics

Somewhat related to the previous point, the West has tried to limit its commercial and economic exposure to China, driving dynamics such as "friendshoring" and "nearshoring". These strategies, where companies seek to establish operations in friendly or nearby countries to mitigate geopolitical risks, have benefited Mexico. The Mexican economy has been favored by these trends, attracting investments that seek more stable alternatives close to the US market. This flow of investments is crucial for the country's economic development and could continue to support the Mexican peso in the long term.

From a broader perspective, the USD/MXN shows signs of a bearish continuation, seeking the Fibonacci retracement of 61.80% from the bullish operation from the 2008 lows around 15.9 Mexican pesos per dollar.

Weekly chart USD/MXN

To materialize this, it will be important for the Mexican currency to surpass the barrier of 16.7, where the MXN has previously shown signs of incapacity. Additionally, to maintain this broader bearish profile, it will be crucial for the USD/MXN to stay below 18 pesos per dollar. This level was respected following global uncertainty due to tensions in the Middle East in mid-April, maintaining the bearish structure in place since 2022.

Conclusion
The elections on June 2, 2024 are expected to bring "stability" and continuity under the leadership of Morena. Financial markets have shown relative calm, focusing on interest rate differentials and positive economic profile. However, long-term political risks, especially related to the presidential elections in the United States, will remain a critical variable. Overall, Mexico is in a favorable position to maintain economic and monetary stability, as long as current investment and monetary policy trends continue.