Mexico peso surges, lifted by Lopez Obrador comments

MEXICO CITY (Reuters) - Mexico’s peso surged on Tuesday by the most in over two years, boosted by a global emerging markets rally and soothing comments from the country’s newly elected leftist president that he will not ramp up spending.

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 MXN=MXN=D2 strengthened over 2.5 percent to a more than one-month high in its biggest one-day percentage gain since early 2016, leading gains among major currencies as the U.S. dollar broadly weakened.

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

But despite the landslide, Lopez Obrador has not strayed from guidance he offered before the election, and on Tuesday he repeated his pledge to maintain fiscal discipline.

“Investors are being reassured by the speeches by Lopez Obrador,” said Carlos Capistran, an economist at Bank of America Merrill Lynch.

He noted that despite the congressional majority, “the message he is sending is that they will maintain a surplus.”

Christian Lawrence, a market strategist at Rabobank, said the peso was being further supported because of high Mexican interest rates even though there are concerns about a shift in economic policy.

Mexico’s benchmark rate is at 7.75 percent - the highest rate among countries with investment-grade credit ratings, analysts noted.

“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.

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, known as NAFTA.

Reporting by Michael O’Boyle and Miguel Gutierrez in Mexico City; editing by Grant McCool and Lisa Shumaker