Peso Selloff Pauses As Mexican President Addresses US, Canada Relations, Targets Ambassadors Over 'Respect For Our Country'

The Mexican peso experienced a positive trading session on Wednesday, advancing 0.5% against the U.S. dollar by 3:00 p.m. ET as President Andrés Manuel López Obrador (AMLO) clarified in a press conference that Mexico’s diplomatic relationships with the United States and Canada remain intact, while emphasizing that the pause in relations applies only to the embassies of both countries within Mexico.

As reported by local newspaper El Economista, AMLO stated, “The pause in relations is specifically with the Canadian Ambassador (Graeme C. Clark) and the U.S. Ambassador (Ken Salazar) because they should not comment on matters that only concern Mexicans. It is a matter of respect for our country.”

Investor Concerns Over Judicial Reform Persist

The peso’s 0.5% gain on Wednesday followed a sharp 1.9% selloff on Tuesday, the steepest one-day decline in two months. The selloff was triggered by negative market reactions to the announcement that Mexico had temporarily halted diplomatic relations with the U.S. and Canada.

Despite the peso’s recovery, concerns still linger among investors regarding AMLO’s proposed judicial reform, which aims to subject judges, magistrates, and ministers to popular elections. Critics argue that this reform could lead to the politicization of the judiciary and increase the risk of corruption.

AMLO responded to these concerns by dismissing U.S. diplomats’ warnings that the direct election of judges could threaten Mexico’s democracy and economic integration with the U.S. and Canada. “Democracy is about the participation of the people, that the people choose, not the elites of economic or political power,” the Mexican president said Wednesday

AMLO plans to present the judicial reform to Congress for approval in September, the final month of his term. The reform “creates an uncertain investment outlook in Mexico,” as indicated by the Mexican Chamber of the Construction Industry (CMIC) on Wednesday.

The ruling MORENA coalition, which will be led by incoming President Claudia Sheinbaum, currently holds a two-thirds majority in Congress, allowing them to pursue constitutional reforms.

Investor sentiment towards Mexican assets remains in a precarious state. The peso has already lost 16% of its value against the dollar since late May, primarily due to rising domestic political risks, while Mexico’s main stock market index has shed nearly 10% of its value during the same period.

U.S.-listed Exchange-traded funds (ETFs) focused on Mexican equities showed mixed performance on Wednesday. The iShares MSCI Mexico ETF EWW gained 0.1%, while the Franklin FTSE Mexico ETF FLMX slipped 0.4%.

Last month, Fitch Ratings affirmed Mexico’s sovereign credit rating at ‘BBB-‘ with a stable outlook. While Fitch noted that the judicial reform could negatively impact Mexico’s institutional profile, the agency also mentioned that it is too early to assess the full severity of the potential changes before they are approved and implemented.

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