April 6, 2018 / 7:21 AM / 14 days ago

Trade worries likely to end Mexico peso's recent upswing: Reuters poll

BRASILIA (Reuters) - Recent strength in the Mexican peso is unlikely to hold in coming months as U.S. President Donald Trump doubles down on his protectionist stance, the latest Reuters survey of currency market strategists showed.

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

The latest results, taken April 3-5, suggest a change in attitudes among economists and strategists, who last month mostly shrugged off the prospect of a global trade war.

Now, they seem increasingly fearful that Mexico could be caught in the crossfire between the United States and China.

“Trump’s stand against China shows that his threats pack a punch, which is not good news for Mexico as the NAFTA talks drag on,” said Bruno Lavieri, an economist at 4E Consultoria.

The United States and China are embroiled in tit-for-tat tariffs that have rattled global financial markets. On Tuesday, the U.S. targeted tariffs on 1,300 Chinese industrial technology, transport and medical products, prompting swift retaliation from China.

Last month, the U.S. government sharply hiked tariffs on steel and aluminum imports in a thinly-disguised swing against Chinese competition.

Mexico and Canada were exempted from those U.S. measures, driving a 5 percent rally in the Mexican peso to a seven-month peak. Still, poll respondents were skeptical about the upswing.

The peso is likely to weaken 2.2 percent to 18.5 to the dollar in 12 months, according to the median of 18 estimates.

Thomson Reuters’ SmartEstimate, which weighs contributions according to past performance, was even weaker than the median.

In comparison, the previous month’s survey, taken just before Trump’s top economic adviser Gary Cohn quit, had indicated that the peso would remain flat in a year from now.

Cohn’s resignation was widely seen as a sign that free trade skeptics were gaining the upper hand at the White House.

Respondents worried that Trump’s tough stand against China could extend to negotiations over the North American Free Trade Agreement (NAFTA) which seem increasingly likely to overlap with Mexico’s July elections.

Canadian policymakers said this week that Mexico, Canada and the United States hade made good progress on negotiations but still had work to do.

Only six of the roughly 30 chapters in the talks have been closed and Canadian officials do not see how the three nations can close the remaining chapters in the next two weeks, a source familiar with Canada’s negotiating position told Reuters.

Meanwhile, nationalist Andrés Manuel López Obrador continues to lead opinion polls in Mexico, potentially adding to Mexico-U.S. tensions.

Still, Obrador has hinted he could be more pragmatic than previously suggested, naming U.S.-trained economist Carlos Manuel Urzua as his potential finance minister. Urzua kept Mexico City’s public accounts in check while serving as finance minister for the local government between 2000 and 2003.

Mexico’s peso would take a bigger hit if Trump kills NAFTA than from an Obrador victory, a Reuters poll showed in January.

In contrast, respondents seem largely unperturbed by Brazil’s October presidential elections, poised to be the most wide-open and hard-to-predict in decades.

The Brazilian real is seen slipping 0.30 percent to 3.35 to the dollar in 12 months, compared with a 1.5 percent decline in the previous month’s survey.

On Thursday, Brazil’s top court rejected former President Luiz Inácio Lula da Silva plea to avoid prison while he appeals a corruption conviction, in a vote that likely ends his political career.

Leftist Lula is still Brazil’s most popular politician, but under Brazilian electoral law a candidate is forbidden from running for elected office for eight years after being found guilty of a crime.

Lula has criticized President Michel Temer’s efforts to curb the growth of public debt, cut social security spending and privatize, which ratings agencies have called critical for Brazil to regain its investment grade status.

Temer has said he is considering running for re-election, but his popularity ranks in the single digits.

Otherwise, the field is split among various potential candidates, from law-and-order Congressman Jair Bolsonaro to São Paulo governor Geraldo Alckmin and nationalist Ciro Gomes.

Reporting by Bruno Federowski; Additional reporting by Miguel Gutierrez in Mexico City, Hernan Nessi in Buenos Aires, Nelson Bocanegra in Bogota, Ursula Scollo in Lima and Felipe Iturrieta in Santiago; Editing by Susan Thomas

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