What will happen to the Mexican peso after the June 6 elections?

MEXICO CITY: Mexico is preparing to go to the polls on June 6 in the largest elections in its history with thousands of elected offices up for grabs. Markets are paying close attention.

In recent weeks, the peso currency has oscillated in a narrow range between 19.75 and 20 per US dollar as investors await the outcome of elections for the lower house of Congress that will determine how much political capital President Andres Manuel Lopez Obrador has for the second half of his term.

The lower house is controlled by the president's National Regeneration Movement (MORENA), which holds just over half of the 500 seats. Recent polls project that, although MORENA could lose some seats, it is likely to retain control of the house with the help of two allied parties.

Still, the result is uncertain. Following are some of the possible scenarios and their impact on the peso, according to 15 exchange market analysts and experts consulted by Reuters.

MORENA RETAINS POWER WITH HELP FROM ALLIES

This outcome is the most likely scenario, according to market analysts, with 14 of the 15 surveyed expecting MORENA to require help from its allies to form a majority, giving the coalition control of the national budget.

In this scenario, the currency could weaken to 20.35 per US dollar, a decline of 2% from its current level, according to market projections, due to fears Lopez Obrador might resort to mechanisms such as plebiscites to push through proposals because of the decline in his party's legislative influence.

"There is a bias that the peso could depreciate in the face of uncertainty about what would follow in the second half of Lopez Obrador's term," said Gabriel Lozano, JP Morgan's chief economist for Mexico.

INCREASED DECISION-MAKING POWER

Only one of the analysts - who asked not to be identified - projected a scenario in which the president and his political allies considerably increased their legislative strength by securing a two-thirds majority, which would allow the coalition to change the constitution.

In this context, the peso could lose more than 5% from current levels, hovering around 21 per US dollar, as investors closely watch the president's potential proposals.

"If MORENA wins a (two-thirds) majority, that would open the door to constitutional changes, such as more intervention in the energy sector, which is likely to cause a lot of concern among investors," said Nikhil Sanghani, economist for Latin America at Capital Economics.

The president is a strong critic of the 2013-2014 energy overhaul, which ended state-owned oil company Pemex's monopoly and opened up the sector to private and foreign capital.

Lopez Obrador has taken steps to strengthen Pemex's weak finances through capital injections and tax cuts, and moved to change oil and gas laws. He has also amended electricity legislation to favor the state-owned power utility, CFE. MORENA LOSES CONTROL OF THE LOWER HOUSE

The least likely scenario among foreign exchange specialists is that the ruling party and its allies could lose their majority in the lower house.

Under this scenario, the currency could rise 2% to 19.50 per US dollar. But they expected these gains would be temporary if Lopez Obrador contested the result as he did in 2006 after narrowly losing the presidential election. Back then, Lopez Obrador led large protests against the outcome.

"In an extreme case, in which MORENA does very badly and the president takes an undemocratic attitude and doesn't recognize the results, there's a risk of political and institutional instability and the exchange rate could react, but I see that as very unlikely," said Marco Oviedo, a Barclays analyst.

Lopez Obrador has a history of criticizing regulators and independent bodies when they do not favor him. In the lead-up to the elections, he has also criticized the national electoral authority, arguing it has been biased against his party.