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Volatility hits Mexican Peso as Central Bank scrambles to inject cash.

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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.

After Coordinated Central Bank Rate Cuts across the world, emerging markets are sold off in risk aversion strategies.

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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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza

@alfonso_forex

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