August 9, 2018 / 9:24 AM / a month ago

Mexico peso's momentum from Obrador victory to last a while: Reuters poll

BRASILIA (Reuters) - The Mexican peso is likely to hold on to much of last month’s rally, the latest Reuters poll showed, underscoring investors’ newfound trust in newly elected President Andrés Manuel López Obrador’s economic credentials.

FILE PHOTO: Bundles of Mexican Peso banknotes are pictured at a currency exchange shop in Ciudad Juarez, Mexico January 15, 2018. REUTERS/Jose Luis Gonzalez/File Photo

The peso MXN=D2 is set to weaken 1.4 percent to 18.72 to the dollar in 12 months, according to the median of 19 forecasts of currency strategists and economists polled by Reuters.

That is still a stronger rate than the 19.00 per dollar consensus in last month’s poll, suggesting forecasters are convinced that the post-election rally was a structural change rather than a hiccup.

The peso jumped nearly 7 percent in July from over 20 to the dollar to around 18, boosted by Obrador’s assurance he would stick to an agenda of fiscal restraint and business-friendly policies.

The move showcased a sharp reversal in investors’ perceptions of Obrador, after concerns he could spearhead a nationalist swing drove the peso to underperform its peers for months.

In fact, 11 of the 16 forecasters who participated in both this month and last month’s polls revised their estimates to account for a stronger peso. One kept its forecast and only four predicted a weaker currency.

NORD/LB, which pursued the biggest revision among those polled, pinpointed Obrador’s defense of central bank independence, entrepreneurial freedom and the private sector as positive signs. Words of support from the powerful business lobby CCE also boded well for cooperation going forward, it said.

“There are evidently market participants in the FX segments who are counting on López Obrador perhaps making for change in Mexico after all,” NORD/LB analysts wrote in a report.

The brighter mood, though surely a change from recent months, did not come as much of a surprise for the most acute observers.

As early as January, Grupo Banorte, which topped Reuters’ ranking of forecasters covering the Mexican peso in 2017, had predicted a bounceback in the peso following the vote.

“Regardless of who wins the 2018 elections, we should observe a relief rally in the peso as investors will acknowledge that macroeconomic stability will prevail given the strength of institutions and the counterweight of Congress,” Banorte’s head strategist for fixed-income and FX Alejandro Padilla told Reuters then.

NAFTA RISK

The improved outlook for the Mexican peso represented the only major change between this month and last month for the six Latin American currencies covered by Reuters polls.

The Brazilian real BRBY, for instance, is expected to strengthen 4.6 percent in 12 months to 3.60 to the dollar, the same rate predicted in July’s survey.

Still, not all observers are convinced the Mexican FX market will sail smoothly from now on, particularly as thorny negotiations between Mexico, United States and Canada on trade drag on.

“The currency still screens as undervalued... but the path from here is likely to be more volatile and gradual,” Goldman Sachs strategists wrote in a report.

Talks around updating the North American Free Trade Agreement have shown some signs of progress as of late, with Mexican officials expecting to soon overcome key stumbling blocks standing in the way of a new deal.

Yet the negotiations have repeatedly defied optimists and extended for a lot longer than originally expected, suggesting any predictions should be taken with a grain of salt.

(Other stories from the global foreign exchange poll:)

Reporting by Bruno Federowski; Editing by Ross Finley and Bernadette Baum

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