Mexico’s currency has the unenviable role of serving as the bellwether for volatility in the world’s emerging markets. And Great Britain’s vote to exit the European Union is sending it for a tumble.
On Friday June 24, the Mexican peso sank to its weakest level ever against the US dollar, 19.52, on news of the UK vote Thursday night, reports the Wall Street Journal. It was its biggest daily loss in nearly five years, following a five-day rally based on expectations that UK voters would opt to remain in the EU. By Friday afternoon, the currency had recovered to 18.91against the US dollar.
The Mexican government responded to the turmoil on Friday (June 24) by announcing it would shave $1.7 billion off federal government spending. The central bank also said it was ready to intervene in the exchange markets if it saw speculators had singled out the country’s currency.
International traders have adopted the heavily-traded currency as aproxy for hedging risk among developing and middle-income countries (a strategy some are also employing for a possible Trump presidency). In the run-up to the Brexit referendum, the currency’s market volatility grew more in step with the British pound, suggesting speculators were using it hedge down-side risk of the UK’s departure from the European Union, reports Bloomberg. The 120-day correlation between the pound and peso has doubled since the beginning of the year.
Mexico’s currency is now the second-worst performer against the dollar this year among the 24 emerging market currencies Bloomberg tracks(Argentina being the worst). Bank of Mexico’s deputy governor, Roberto del Cueto, said the body would assess the impact of Brexit on the markets before its next monetary policy meeting on June 30. “Markets often have an overreaction, and as time passes the different variables begin to settle, and exchange rates adjust,” he said on Friday.
Source: qz.com