Mexico peso surges on tax vote, stocks edge higher

(Adds comment, updates prices)

MEXICO CITY Oct 21 (Reuters) - Mexico's peso firmed on Wednesday as the lower house of Congress passed a scaled-back version of President Felipe Calderon's tax reform proposal that was seen not diluting the bill as much as expected.

Further supporting the peso, strong earnings reports from U.S. banks fueled appetite for riskier assets, which combined with bets that U.S. interest rates will remain very low for some time, boosted the appeal of higher-yielding currencies.

The peso MXN= MEX01 firmed 0.89 percent to 12.92 per U.S. dollar following the early morning vote on the revenue side of the 2010 budget.

While the opposition rejected a proposed 2 percent sales tax on all goods and services, they lifted the value-added tax, or VAT, to 16 percent and raised income taxes for high earners to 30 percent. For story, see [ID:nN21477861]

"I think people expected revenue to be watered down more than it was. Overall it was a pleasant surprise," said Eduardo Suarez, senior emerging market strategist at RBC Capital Markets in Toronto.

Analysts also pointed to a new tax on capital inflows in Brazil that was making Mexico more attractive to investors.

Mexico's peso has seesawed in recent sessions amid uncertainty over whether the tax plan will do enough to compensate for declining revenue from falling oil production and stave off a downgrade of the country's debt ratings.

"The exchange rate is looking positive, more likely for the idea that there finally is a budget rather than the content, which does not seem so positive," said Daniela Blancas, a strategist at Scotiabank in Mexico City.

Pessimists of the tax plan's prospects for helping Mexico skirt a downgrade by Wall Street ratings agencies pointed to the lack of measures to widen Mexico's weak tax base. Food is tax-exempt and a much of the economy operates without paying taxes.

Carlos Peyrelongue, a strategist at Bank of America Merrill Lynch, said in a report that the chance for a downgrade of Mexico's debt was now more than 50 percent.

The government's benchmark 10-year peso bond MX10YT=RR bid up 6 basis points to 8.11 percent, hurt by expectations that the new taxes will push up inflation.

The IPC stock index .MXX rose 0.16 percent to 31,050.75 points, lifted by a 2 percent gain in shares of broadcaster Televisa (TLVACPO.MX) to 53.14 pesos ahead of its earnings report on Thursday.

Shares in Telmex (TELMEXL.MX), the dominant fixed-line firm that is under pressure from regulators looking to boost competition, slid 0.96 percent to 11.36 pesos after lawmakers passed a 3 percent tax on telecommunications services.

"Telmex can't pass through the additional taxes to consumers due to the regulation risks it faces," said Francisco Suarez, head of analysis at Actinver brokerage in Mexico City.