Mexico's peso fell after the leading candidate for governor in the border state of Tamaulipas was gunned down in the highest profile killing of a politician since 1994, fuelling concern companies may cut back on investment in the country.
The currency dropped 0.7 per cent to 12.7332 per dollar at 5pm New York time from 12.6490 on June 25. Government peso-denominated bonds erased gains.
Rodolfo Torre, a 46-year-old member of the Institutional Revolutionary Party, was killed in Tamaulipas state, said Interior Minister Fernando Gomez Mont in a press conference broadcast on television.
"The market flipped suddenly a few minutes after the news of the candidate's murder," said Ramon Cordova, a currency strategist at Base Internacional Casa de Bolsa SA in Monterrey, Mexico. "This isn't going to be a long-term risk, because we have been seeing this kind of violence in the country for two or three years now."
Torre had 61 per cent support for the July 4 election, compared with 30 per cent for Jose Julian Sacramento, of the National Action party, according to a June 12-16 poll by Mexico City-based Consulta Mitofsky that had a margin of error of 1 percentage point.
Presidential candidate Luis Donaldo Colosio was killed March 23, 1994, in Tijuana. The killing shook investor confidence and was one of the factors that led to a peso devaluation that December.
The yield on Mexico's 10 per cent peso bond due in 2024 was little changed at 7.225 per cent, according to Banco Santander SA. Earlier, the yields fell to a record low of 7.2 per cent.
Torre's killing "provoked the peso to start dropping", said Omar Martin del Campo, a trader at Banco Ve Por Mas SA in Mexico City. "This situation isn't anything new, and the market is starting to discount it already."
More than 22,000 people have died in drug trafficking- related violence in Mexico since President Felipe Calderon took office in 2006.
The violence in Mexico, including Torre's assassination, may limit the peso's gain against the dollar this year, Jimena Zuniga, a Barclays Capital analyst, wrote in a note to clients today.
Torre's killing is "the clearest attack on the political process since crime became a focal point for the markets in early 2009".
The government may escalate its war against crime and "if this is the case, we think violence could intensify and headlines are unlikely to get any better", she wrote.
The peso may end the year at 12.22 pesos per US dollar, according to the median estimate of 22 analysts in a Bloomberg survey. Barclays forecast the peso to rise to 12.13 pesos per dollar.
