September 15, 2016 / 8:23 PM / a year ago

Mexican peso plunge against C$ seen dimming Canada export hopes

TORONTO, Sept 15 (Reuters) - The Mexican peso's plunge to a 2-1/2-month low against the Canadian dollar on Thursday is seen putting further pressure on Canadian exporters who have struggled with weak growth this year.

Canadian industries such as auto parts compete with Mexico to export to the United States. A weaker peso makes it harder for Canadian companies to win market share and attract investment such as new factories.

The peso closed at a record low on Wednesday against the U.S. dollar, which Mexican Finance Minister Jose Antonio Meade said was due to U.S. election uncertainty, lower oil prices and concerns about the next U.S. Federal Reserve move.

A Reuters poll earlier this month showed that the peso was expected to strengthen against the Canadian currency over the next 12 months.

However, strategists say that uncertainty related to the U.S. presidential election will weigh more heavily on the peso than on the Canadian dollar.

"The risks are certainly more pronounced for the Mexican peso than they are for the Canadian dollar, given the more confrontational rhetoric that (Republican presidential candidate Donald) Trump has had toward Mexico." said Ian Gordon, FX strategist at Bank of America Merrill Lynch.

Trump has said he would renegotiate or scrap the North American Free Trade Agreement if he is elected.

Investor concern that major central banks are reluctant to use more monetary stimulus has also triggered selling of emerging market currencies.

The peso is treated like a "piñata" by investors looking to sell emerging market currencies due to its better liquidity, said Mazen Issa, senior FX strategist at TD Securities.

To be sure, the risk-sensitive Canadian dollar has also lost ground recently against the greenback. Its 19 percent depreciation since mid-2014 has fueled hopes for a pick-up in non-energy exports.

However, the Canadian dollar has appreciated 20 percent against the peso over the same period.

Canada's central bank has been looking to non-energy exports to pick up the slack caused by weak oil prices.

The hollowing out of Canada's manufacturing sector has also contributed to the disappointing export recovery, reducing its ability to benefit from U.S. growth, BofAML's Gordon said.

"If you look at the share of the U.S. import market of Canada, Mexico, China, Japan; Canada has been a clear loser relative to Mexico and China in particular over the past several years because of those competitiveness issues." he added. (Reporting by Fergal Smith; Editing by Cynthia Osterman)

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