Mexican Peso Likely Can Appreciate More, Finance Head Says

(Bloomberg) -- Mexico's economic fundamentals suggest that the peso still has room to appreciate after its world-beating rally from a record low at the start of the year, according to the nation's finance minister.

The peso's 17 percent surge from its weakest level on Jan. 11, more than double the gain for any other major currency, reflects both Mexico's growth potential and the overreaction by investors in the first days of 2017, Jose Antonio Meade said in an interview in Washington.

Asked about the negative outlook on the nation's credit grade at S&P Global Ratings, Fitch Ratings Ltd. and Moody's Investors Service, he said that Mexico's debt profile is better now than it was at the same time last year, when Moody's became the first to put the country on notice. Meade said he also expects the negotiation process with the U.S. over the North American Free Trade Agreement will make the region stronger and better able to compete with the rest of the world.

"Clearly the exchange rate was not reflecting fundamentals at the beginning of the year," Meade said Wednesday after arriving for meetings of the International Monetary Fund and World Bank. "They're better reflected today. We are not looking at a specific target or a specific level. We think there is likely still room for further appreciation."

The odds of Mexico's credit rating being cut have declined, given that the government will probably hit its original fiscal targets, public debt levels appear to have peaked and the worst-case scenario for a Nafta rewrite is unlikely to materialize, UBS AG analysts wrote in a research note to clients on Tuesday.

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U.S. President Donald Trump's promise to end or overhaul Nafta, which he blames for the loss of U.S. jobs and a widening trade deficit with Mexico, led the peso to an unprecedented level of 22 per dollar in January. Investors have shed their doomsday outlook on Mexico in recent weeks after White House officials repeatedly said that Mexico and the U.S. stand to benefit from a renegotiation of Nafta, and the peso on Tuesday reached the strongest level since the U.S. election in November, surpassing 18.5 per dollar.

On the relationship with the U.S. and Nafta, "we think that the reasonable assumption is that dialogue should result in a stronger, more dynamic and more competitive North America," Meade said. "If through dialogue North America doesn't come out stronger, that means we made at some point a fundamental mistake."

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Robert Jameson