Photographer: Susana Gonzalez/Bloomberg

Mexico Peso Slumps on Nafta Concern, Zavala's Potential Split

  • First lady as an independent would favor Amlo, Nomura says
  • Markets had priced in too much optimism on Nafta: Finamex

The Mexican peso slid to a four-month low as speculation rose that Nafta talks will be delayed and local journalists said the former first lady would split from the nation’s largest opposition party, potentially boosting the chances of leftist Andres Manuel Lopez Obrador.

The peso’s slide shows local markets haven’t fully priced in the possibility of a delay in Nafta, Finamex analysts wrote in a note to clients. Lopez Obrador, known as Amlo, has put markets on edge by seeking to reverse a landmark reform that allowed broader participation by private companies in the energy industry. Signs that former First Lady Margarita Zavala is leaving the National Action Party could strengthen his hand.

"The news about divisions in the PAN with Mrs. Zavala running as an independent favors Amlo," said Benito Berber, senior economist for Latin America at Nomura. In addition, "The peso is finally starting to price in the probability -- not low -- that Nafta gets canceled."

The peso fell 1.2 percent to 18.4962 at close of markets Thursday, partly reflecting tumult in Mexican politics, said Bank of America strategist Claudio Irigoyen, who recommends shorting the peso. Zavala, the wife of Felipe Calderon, has been threatening to leave the PAN if she doesn’t get the nomination. Several media outlets reported Thursday that she’ll leave, citing unidentified sources, while Zavala herself said she’d make an announcement regarding the July 2018 election on Friday.

The Finamex analysts, led by Guillermo Aboumrad, pinned much of the blame for the peso’s recent poor performance on local factors, including a potential delay in Nafta and Mexico’s lack of room for a response to a potential U.S. tax cut.

“Companies that were undecided between putting a factory in Mexico or the U.S. to sell to the latter market can be persuaded to settle in the US with a lower tax rate,” the Finamex analysts said in the note.

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