Mexico peso surges in wake of election on emerging market rally

MEXICO CITY (Reuters) – Mexico’s peso surged on Tuesday to a more than one-month high in the wake of Sunday’s election of a leftist president, boosted by a global emerging markets rally against the dollar.

The strengthened around 2 percent, leading gains among major currencies as the U.S. dollar broadly weakened, raising the market’s risk appetite and prompting some flows into other currencies.

The win by longtime political outsider Andres Manuel Lopez Obrador, who takes office on Dec. 1, was expected by markets, but his margin of victory was wider than projected and it appears his coalition will have a majority in Congress.

Despite uncertainty about the shape of economic policy in his administration, foreign investors are attracted to the peso because of high Mexican interest rates, said Christian Lawrence, a market strategist at Rabobank.

Mexico’s benchmark rate is at 7.75 percent compared to 6.50 percent in Brazil.

“I have been surprised by the complacency around the win by Lopez Obrador, but there is a mindset of giving him the benefit of the doubt,” Lawrence said.

Lopez Obrador and his team have strived to mollify the concerns of investors, telling them he will maintain fiscal discipline and respect private investment.

Carlos Urzua, Lopez Obrador’s pick to be his finance minister, told Reuters on Monday that Lopez Obrador supports ideas such as creating a fiscal committee for prudent economic management and cost cutting at state-owned oil firm Pemex.

Lopez Obrador has said he will fund increased social spending on pensions for the elderly and scholarships for youths by eliminating waste and fighting corruption. But analysts doubt he will be able to quickly achieve enough savings with his anti-corruption plan.

Lawrence said that concerns about an increase in government spending could come back to hit the peso later this year when Lopez Obrador presents his first budget in December.

On Monday, an advisor to Lopez Obrador told Reuters the election win would jumpstart talks between Mexico, the United States and Canada to renegotiate the North American Free Trade Agreement (NAFTA).

Jesus Seade, Lopez Obrador’s chief negotiator for NAFTA, said the talks to revamp the 24-year-old pact had been hindered by uncertainty over the outcome of the Mexican election, and would pick up following Lopez Obrador’s decisive win. He stressed an agreement was possible before the next government takes power in December.

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