A good example of the volatility of Emerging Markets was witnessed today by Mexican Peso Forex Traders.
The Mexican Peso (MXN) reached a record low versus the USD this morning at 8:00 am EDT. There were different factors that pressured the Mexican currency to depreciate and their combined effect resulted in the spike shown in the graph.
The unannounced Rate Cut by several of the Major Central Banks took the market by surprise and sent traders looking to sell their exposure in emerging markets. Low liquidity and a rumor about a Super Market chain bankruptcy forced the MXN to fall by almost 20% after reaching record highs in August. The market move this morning accounted for 15% (8% of that was before the market opened).. The Peso pared back some losses (about 2%) after the Central Bank announced a cash injection mechanism to be put in place when the currency falls by more than 2%.
The Central Bank of Mexico (Banxico) will sell a $2.5b in a $400 million daily auction, but conditioned to the peso depreciating by more than 2%. Risk aversion has forced money flows to exit emerging markets as higher yielding currencies are sold off an investors search for safer assets. Fundamental data for Mexico has been strong considering the US (Mexico’s largest trading partner) continues to head towards a recession, but market forces and uncertainty in a low liquidity environment can cause significant damage.
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