Mexico's Peso Rallies as Risks Recede -- Update

By Anthony Harrup Features Dow Jones Newswires

Mexico's peso traded at its strongest level in more than a year Wednesday, gaining against the U.S. dollar for an eighth-consecutive day as both domestic and external risks to the currency continue to decline.

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One dollar bought fewer than 18 Mexican pesos for the first time since mid-August 2016, and closed in Mexico City at 17.9295 pesos, according to Infosel, below 18 pesos for the first time since May of last year. The peso briefly gave back some ground after the Federal Reserve's quarter-point interest rate increase, although the Bank of Mexico is widely expected to match the move at its June 22 meeting.

Risks ranging from the renegotiation of the North American Free Trade Agreement to a left-wing nationalist party winning Mexico's 2018 general elections have subsided, helping to make the peso the world's best-performing emerging market currency this year. The peso is up about 23% from the record-low 22 to the dollar reached in January.

The latest string of gains began after the ruling Institutional Revolutionary Party held power in a key state gubernatorial election on June 4, despite a strong showing by the Morena party led by Andrés Manuel López Obrador. A Morena win could have given greater impetus to Mr. López Obrador, who opposes the opening of the country's energy industry to private and foreign investment and is expected to make his third bid for the presidency next year.

"In the short term, there is much less political risk. The market will likely discount reduced chances of Morena winning the 2018 election," said Benito Berber, a Latin America strategist at Nomura Securities who is changing his year-end forecast for the peso to 18 to the dollar from 20, and sees the peso ending the second and third quarters at 17.75 to the dollar.

Mexican President Enrique Peña Nieto has had the lowest approval ratings of any president in recent decades, due in large part to increasing criminal violence and corruption scandals that have overshadowed his administration's achievements like overhauling the energy sector, lowering telecommunications costs through increased competition, and 15 consecutive quarters of economic growth.

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"Mexico's economy is holding up better than many expected; private consumption remains robust, while business sentiment and activity are both improving. External accounts show a similar picture, with workers' remittances trending higher and the trade balance showing signs of improvement," UBS said in a recent report. "The negotiations with the U.S. regarding Nafta's future are important, but our base case foresees an agreement where both countries could benefit."

The Nafta talks remain a risk, although with U.S. Commerce Secretary Wilbur Ross seeking to complete the negotiations quickly ahead of elections in Mexico and U.S. midterms next year, "it suggests that what they want to negotiate isn't that much" said Mr. Berber.

Other factors in favor of the peso include the Mexican government's commitment to a primary budget surplus this year, and its intention of using funds from the central bank to lower debt, reducing the likelihood of a sovereign credit downgrade. Another concern was allayed by foreign direct investment of $7.95 billion in the first-quarter, up slightly from a year before despite fears that investment would dry up with President Donald Trump's criticism of U.S. companies that move production abroad.

Goldman Sachs sees the peso's fair value just above 17 to the dollar. "But given that growth remains somewhat sluggish it serves the economy well to have a currency that remains competitive, but is not excessively undervalued," the bank's Latin America economist Alberto Ramos said in a note.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

June 14, 2017 17:05 ET (21:05 GMT)