More ‘neighborly’ U.S.-Mexico tone on NAFTA drives peso surge

By Miguel Gutierrez and Michael O’Boyle. Reuters News

MEXICO CITY, March 3 (Reuters) – The new U.S. commerce secretary took a softer tone on trade talks with Mexico on Monday and his Mexican counterpart echoed the view that the two sides could reach a mutually beneficial deal, driving the peso to a nearly four-month high.

Already the best performing major currency in recent weeks, the peso MXN=MXN=D2 strengthened about 2.5 percent to 19.50 per dollar on Friday, its best since Nov. 9, the day after Donald Trump’s surprise presidential election win.

The peso hit a historic low on Jan. 11, after tumbling about 17 percent on concerns that Trump would follow through on threats to tear up the North America Free Trade Agreement (NAFTA) that underpins Mexico’s economy.

Speaking on CNBC, Secretary of Commerce Wilbur Ross said a sensible trade deal with Mexico would help the peso, which he acknowledged had been hit by fears about what could happen to NAFTA.

“It’s a much more neighborly discourse,” said Benito Berber, an analyst at Nomura in New York. “The best tool to help the peso is to change the tone on NAFTA.”

Berber said the recent signals from the U.S. administration were calming worries that Trump would seek to end NAFTA or impose hefty tariffs on U.S.-bound Mexican goods.

In the interview, Ross highlighted rules of origin clauses in NAFTA as one of the pact’s weak points, an area Mexico has said it is willing to discuss.

In Detroit on Friday, Mexican Economy Minister Ildefonso Guajardo said he was hopeful that Mexico, Canada and the United States could begin discussions in June to “modernize” NAFTA, stressing that Mexico would not accept tariffs.

“It makes no sense to introduce an agreement with border restrictions or tariffs,” he told an audience of several hundred people, including executives of the Detroit automakers.

The peso’s deep losses had been working against Trump’s objective to narrow the U.S. trade deficit with Mexico, since the weaker peso makes U.S. exports more expensive in Mexico while making Mexican exports cheaper in the United States.

“A weak peso works against the interest of the U.S. administration, because it makes Mexican exports more attractive,” Guajardo said.

Tackling one of the biggest distortions in U.S.-Mexican trade relations, Guajardo said an updated NAFTA deal could include stronger labor protections to help lift pay in Mexico, where workers earn a fraction of U.S. wages.

Labor protections included in a NAFTA side agreement are not enforceable, but were made central to the Trans Pacific Partnership (TPP) trade deal negotiated with the Obama administration, a possible model for an updated NAFTA.

In his interview, Ross also suggested that a new mechanism should be created to stabilize the peso exchange rate, which added to recent speculation that Mexico could try to use more measures to bolster the currency.

Central Bank governor Agustin Carstens denied a Bloomberg story this week suggesting that Banco de Mexico was seeking a swap line with the U.S. Federal Reserve to boost liquidity.

Mexico’s central bank, which has hiked interest rates by 325 basis points since last year, last week announced plans to offer up to $20 billion in currency hedges to shore up the peso.

The central bank on Monday will auction up to $1 billion of the new hedge instruments, and on Friday it said it would offer six maturities of up to one year, offering more in shorter maturities than longer.