Mexico Peso Falls as Investors Fret Over Finance Minister's Exit

(Bloomberg) -- The Mexican peso plunged by the most since a tariff standoff with the U.S. in late May after Finance Minister Carlos Urzua abruptly resigned, casting doubt on the government’s ability to stave off economic and financial challenges.

Urzua announced his decision on Twitter, citing conflicts of interest and policy disagreements within Andres Manuel Lopez Obrador’s administration. The peso fell by as much as 2.3%, before trimming losses when Arturo Herrera, the deputy finance minister, was named as Urzua’s replacement. The iShares MSCI Mexico ETF tumbled and the yield on the nation’s dollar bonds due in 2026 rose to 3.7%.

“This is a very bad sign,” said Benito Berber, the chief economist at Natixis in New York. Still, Berber said Herrera will help calm markets and offer some continuity: “Urzua and Herrera gave credibility to economic policy.”

Here’s what other investors and analysts had to say:

Ilya Gofshteyn, senior emerging markets macro strategist at Standard Chartered Plc.

• “The market is right to take this seriously. Urzua was seen as ‘the adult in the room’ in the AMLO administration, someone who lent credibility to an otherwise economically heterodox administration”
• “This was unexpected and while MXN is attractive from a carry standpoint, there’s a reason real rates are as high as they are in Mexico”
• “Tactically bullish MXN views are all good and well, but on any given day a development of this sort can creep up and force position liquidation. Given how heavily subscribed MXN remains among the global investor community, those squeezes tend to be especially painful”

Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. in New York

• “The resignation letter is unconventional and direct: it expresses clear dissatisfaction with internal policy and personnel dynamics within the AMLO administration”
• “This is an unexpected and negative development for it suggests: (1) significant policy and inter-personal frictions within the AMLO administration and (2) that economic policy decisions may be guided and informed by non-economic/financial criteria and led by policy makers without the required and relevant credentials to define policy and manage the fiscal accounts”

Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York

• “Herrera has interacted with investors extensively, so he is not a concern. It’s really the government policies that are a concern and are unlikely to change as a result of the resignation”

Christian Lawrence, a New York-based strategist at Rabobank who was last quarter’s top peso forecaster

• “Given that fiscal slippage and Pemex are big concerns, the reaction is not surprising. Remember, Fitch downgraded Mexico to one notch above junk on Pemex concerns and the Moody’s outlook was moved to negative”

Claudia Ceja, a strategist at BBVA in Mexico City

• “The Herrera nomination is positive, but even so, the criticism from Urzua is very strong”
• “Even if the government is able to assign another market friendly minister, the fact that Urzua is openly criticizing the decision making is certainly negative”

--With assistance from Justin Villamil and Karina Montoya.

To contact the reporters on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net;George Lei in New York at glei3@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Alec D.B. McCabe

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