- Currency declines to lowest-ever level against U.S. dollar
- Peso is worst emerging-market performer after Argentina
The Mexican peso tumbled to a record low after the U.K. voted to leave the European Union, prompting reassurances from policy makers that they will intervene if necessary to defend the currency from speculators.
The currency, which traders consider a bellwether for risk because it’s the most liquid in emerging markets, weakened as much as 7.1 percent in overnight trading, to an unprecedented 19.5187 per dollar. It pared losses to 3.7 percent, trading at 18.9227 per dollar as of 1:30 p.m. in New York. The cost of hedging the country’s sovereign debt against losses with credit default swaps jumped the most in three years.
While the peso was heading for its biggest daily loss in almost five years, the currency is down just 0.4 percent this week following five straight days of gains spurred by speculation that the U.K. would vote to stay in the EU. The peso was caught up in a wave of selling Friday as those assumptions proved false, with stocks plunging from Tokyo to London and the pound falling the most on record. Assets seen as safe havens rallied, led by gold and U.S. Treasuries.
“The Mexican peso is likely to be used as an emerging-market proxy as risk sells off following Leave uncertainty,” strategists at Morgan Stanley including London-based Andrew Sheets and Hans Redeker wrote in a report released after British television networks projected a “Leave” victory.
Policy makers will monitor markets and act against speculation that would spur excessive moves in the peso, while Mexico’s banking system won’t be stressed by Brexit, deputy central bank governor Roberto del Cueto told reporters at a morning press conference. The country has covered all its financing needs for this year and doesn’t expect a significant impact on trade, Finance Minister Luis Vedegaray said at the same event.
The peso’s $135 billion in daily volume, longer-than-average trading hours and Mexico’s low interest rates relative to peers make it a favorite among investors seeking to wager on global events from Chinese economic releases to political turmoil in Brazil. The correlation between the peso and the pound rose to a 10-month high as the referendum came closer, allowing traders to bet on peso declines as a hedge against potential losses from the decision.
The Mexican currency is the second-worst performer against the dollar this year among 24 emerging market currencies tracked by Bloomberg, having fallen 9 percent. Only Argentina’s peso has fared worse.