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(Bloomberg) — Mexico’s peso slipped, reversing earlier gains as preliminary election results showed the ruling party winning in a landslide that could empower it to increase state control of the economy and undermine checks on its power. 

The peso lost as much as 0.3% to 17.06 per dollar in early Europe trading, reversing an advance seen during the Asia session and lagging other emerging-market currencies. First official projections showed Claudia Sheinbaum, the protege of President Andres Manuel Lopez Obrador, winning by at least 30 percentage points. 

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Read More: Sheinbaum Set to Become Mexico’s First Female President

While her win was largely priced in, the quick count published by the electoral authority also pointed to the ruling Morena party and its allies winning a so-called supermajority in the lower house and clinching at least a simple majority in the Senate — more support than polls suggested. Investors were closely eyeing the congressional races as a two-thirds majority would give the ruling coalition a mandate to pass more ambitious reforms that could change the constitution.

“The margin of victory was much wider than expected and the probability of gaining two-thirds of Congress is high,” said Claudia Ceja, a strategist at BBVA Mexico. “It opens the space for constitutional reforms. The attention of the investors was focused on the congress.”

Reforms

The congressional results will determine if Morena will be in the position to pass a swath of proposals made by Lopez Obrador in February. Those bills include plans to reduce the number of lawmakers and allow for the direct election of Supreme Court justices. They also include eliminating independent regulators, like the antitrust commission, as well as establishing new pension obligations and mandatory minimum wage hikes.

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Such an outcome could sap appetite for Mexico assets, including the peso, which has been one of the top performing major currencies this year against the dollar. The peso has defied calls that it’s overvalued and continued to rise, with Mexico’s close ties with the US shielding the currency from the strong dollar that has roiled other developing nations. It’s also been supported by a hawkish central bank that has been the slowest in Latin America to lower borrowing costs.

Read More: Mexican Peso Is So Strong Investors Fear Betting Against It 

If the next government and Congress adopt an unorthodox agenda that undermines Mexican institutions, the peso would weaken to 19.20 per US dollar — a 13% plunge from current levels — Morgan Stanley analysts said in an April note. Barclays strategists saw odds the peso would see a 4% plunge if Morena were to win a constitutional majority that would lead to a more leftist radical reform agenda, they wrote in a note ahead of the election, while adding that chances of that were small. 

“This is not a positive result,” said Alejandro Fuchs, a strategist at Itau BBA. “Although they are still preliminary we would expect some risk-off on financial assets overall.” 

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‘Super peso’ 

The peso has also been the best performing major currency over the last six years, during Lopez Obrador’s term, flying in the face of concerns that his policies would spark a deep devaluation. His government bucked expectations for higher spending and instead maintained fiscal discipline that set it apart from other economies, whose deficits blew out during the pandemic. However, Lopez Obrador ramped up spending this year, leaving the challenge to Sheinbaum to rein it back in.

Sheinbaum’s double-digit lead in the months ahead of the election had helped keep the peso steady on an expectation of continuity. Investors have seen Sheinbaum providing stability in Latin America’s second-largest economy with the potential that she takes a more market-friendly tack than Lopez Obrador, who could not seek another term. 

Read More: AMLO Looms Over His Protege’s Path to Historic Victory in Mexico

Analysts at Morgan Stanley projected there was a chance that Sheinbaum could be more open to private investment in the power sector and take measures to draw more factories to Mexico in the trend called nearshoring. 

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In her first speech as President-elect, Sheinbaum stuck to the tone she struck during the campaign, pledging to respect central bank autonomy and fiscal discipline, calling for more investment in renewable energy and promising to promote foreign investment. 

“Sheinbaum has pledged to continue President Andres Manuel Lopez Obrador’s agenda,” said Elias Haddad, senior market strategist at Brown Brothers Harriman in London. “Beyond Mexico’s stable political backdrop, the fundamentals remain positive for MXN.”

The strong carry appeal for the currency should continue to provide some support for the Mexican peso, potentially making any selloffs transitory, BBVA’s Ceja said. Mexico’s long transition period — the new Congress wont take office until September, while Sheinbaum will be inaugurated in October — also mean it will take some time to see if investors initial concerns play out. 

“This is not what market participants were expecting,” said Gabriel Casillas, chief Latin America economist at Barclays. “We could see a further adjustment of asset prices to reflect this apparent new reality, where some reforms that the president submitted to congress back on February 5 can actually be approved, even before the new president takes up office.” 

—With assistance from Matthew Burgess.

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