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After reversing Trump slump, investors say Mexico's peso has further to go
June 14, 2017 / 1:08 PM / a month ago

After reversing Trump slump, investors say Mexico's peso has further to go

4 Min Read

A man walks in front a board displaying the exchange rate for Mexican peso and U.S. dollar at a foreign exchange house in Mexico City, Mexico, February 9, 2017.Edgard Garrido

NEW YORK (Reuters) - The Mexican peso touched its highest level in 10 months against the U.S. dollar on Wednesday, approaching its highest since May 2016, and its run likely has not run out, some investors say.

The peso fell to its lowest level in history against the dollar on Jan. 19, the day before U.S. President Donald Trump's inauguration, as traders worried that his campaign pledges to scrap the North American Free Trade Agreement and erect a wall between the two countries would weaken the Mexican economy.

But since Trump moved into the White House the peso has been on a tear, rising more than 20 percent against the dollar. It has been the world's best performing major currency so far this year.

Rhetoric from Trump's administration has become less corrosive since he took office. This and the Bank of Mexico's aggressive monetary policy, including unexpectedly raising its benchmark interest rate last month to an eight-year high of 6.75 percent, have helped the peso firm to its highest level since Aug. 16.

Fund managers told Reuters they largely believe the peso's growth will continue.

"(The peso) has had good momentum relative to other emerging currencies in recent months, and that could continue for some time longer," said Morgan Harting, lead portfolio manager for all multi-asset income strategies at AllianceBernstein.

"And though it is no longer cheap, it also does not look expensive in terms of purchasing power parity."

One of the primary factors helping the peso's rise has been the reversal of speculator positions on the currency.

Last week, speculators raised the number of net-long contracts on the peso to 84,821, the highest since June 2014.

"This is partly due to the changes in U.S. politics, and partly as global economic headwinds have dissipated somewhat – allowing carry trades to flourish again," said Ken Dickson, investment director, foreign exchange, at Standard Life Investments.

Javier Murcio, senior sovereign analyst for emerging market strategies at Standish, a division of Bank of New York Mellon Corp, said the results of recent state elections in which left-wing candidates were unable to unseat traditional powers was also a strong sign.

However, he warned the peso was nearing important technical resistance levels at which traders could reduce or reverse their positions.

"Chances for further appreciation remain, but as the inflation adjusted exchange rate begins to lose competitiveness, important floors may appear at 18/USD or even 17.75, which are levels at which further gains may be difficult to sustain," Murcio said in an email.

Alejo Czerwonko, an emerging market strategist at UBS Wealth Management, said earlier this week that while he remains bullish, the peso is nearing the asset manager's target of 18 pesos per dollar. The peso broke through that level Wednesday morning after data showing unexpectedly soft U.S. consumer prices and retail sales data.

With the U.S. dollar continuing to weaken despite expectations for interest rate increases from the Federal Reserve, investors who hold the peso remain bullish.

"As long as the (U.S. dollar) is stable to lower, we believe the currency can continue to appreciate even if the (Mexican) central bank begins to cut rates later this year," said Jim Barrineau, co-head of emerging markets debt relative at Schroders.

Reporting by Dion Rabouin; Editing by Chizu Nomiyama

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