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Sharp rise in Mexican Peso after state election

Mexico’s peso threatened to hit its highest level since November, buoyed by projections pointing to a narrow victory for the ruling party in the country’s biggest state after polls had earlier predicted a tight race.

The gubernatorial election in the populous State of Mexico was a critical test for president Enrique Pena Nieto and the ruling party, the PRI, ahead of next year’s presidential vote.

The state, the president’s power base, has been in PRI hands for 88 years but support for the leftwing Morena party, led by the populist Andrés Manuel López Obrador, has been worrying investors.

The preliminary result generated a strong rally, pushing the peso 1.6 per cent higher to trade as high as MXN18.35. That propelled the currency within touching distance of the May 25 high of 18.34, the peso’s strongest level of the year and its best reading since the US election.

The currency was volatile in the final week of the campaign and dipped to its lowest level in two weeks after polls predicted the race was too close to call.

Elsa Lignos, forex strategist at RBC Capital Markets, warned against being too bullish on the peso because of likely court challenges to the poll outcome.

Citi analysts also cautioned about over-interpreting the outcome, warning last week that the July 2018 presidential election was too far away for investors.

The bank also said the gubernatorial outcome would have no impact on Banxico, the country’s central bank, which surprised markets last month by raising rates to 6.75 per cent and is expected to hike rates further before the end of the year.

Banxico is alarmed at the pace of inflation, which is running at twice the level of its 3 per cent target. But it revised upwards its 2017 growth forecast after first-quarter GDP of 0.7 per cent and expected inflation to reverse its rising trend next year.

Investors had been preoccupied with Mexico’s relations with the US, expecting its trade would suffer as President Trump ratcheted up criticism of the North American Free Trade Agreement shortly after his election.

The peso fell to an all-time low of MXN22 in mid-January, but investor scepticism about US trade policy has resulted in the peso gaining 18 per cent since that low.