06:59 AM EDT, 07/04/2024 (MT Newswires) -- The Mexican peso (MNX) has continued to be volatile after the June 2 elections, where the ruling bloc led by MORENA outperformed expectations in congressional elections, noted Deutsche Bank.

Consequently, this led to increased risks that outgoing President Andres Manuel Lopez Obrador will push a set of market-unfriendly reforms during his overlap with the new congress in September, wrote the bank in a note to clients. Taken together, the proposed reforms to the judiciary, autonomous bodies, electoral system, pensions, among others, result in a significant transfer of functions and power to the executive branch, and an increase in the rigidity of the public spending profile.

Deutsche Bank has three market-sensitive observations regarding the constitutional discussion in Mexico:

-- Observation 1: the missing piece in the puzzle is whether the MORENA bloc gets a qualified majority in Congress. It already has one in the lower chamber -- although there is a controversy regarding the proportional representation votes -- and it will most likely be three to four seats short of it in the Senate. As a consequence, should the governing coalition manage to get the three to four remaining votes, the bank expects an aggressive pursuit of the constitutional agenda.

-- Observation 2: an overarching concern among many of the proposed amendments is that they allegedly add more power to the executive branch of government, eroding the checks-and-balances system and deteriorating the quality of institutions and policy-making. Deutsche Bank selects the most market-sensitive reforms and expands on their impact on the rule of law, the independence of powers, fiscal consolidation and new investment.

-- Observation 3: in terms of implications for MXN, if most of the economically sensitive reforms are passed, this could undermine the prospects of foreign direct investment (FDI) inflows and optimism about Mexico's role in the nearshoring narrative. As such the bank sees investor caution on MXN as justified, especially given the United States election coming up in November, where topics related to Mexico might play an important role. Deutsche Bank has recently turned more negative on the currency as it acknowledges the increased risks the constitutional discussion brings and the potential negative effects on Mexican assets if they are approved.