Mexico’s Central Bank Tested by Traders as Peso Falls to Record

  • Peso has dropped 5.2% this month, most among major peers
  • Central bank hasn’t sold dollars directly since February

The Mexican peso posted the biggest loss among the most-traded currencies as it sank to a record, testing the central bank’s willingness to intervene.

The peso weakened 0.7 percent as of 12:24 p.m. in New York and traded as low as 19.8723 per dollar Tuesday, missing out on the gains in most emerging-market currencies as policy makers in the U.S. and Japan entered their final stretch before announcing decisions on their benchmark rates. The currency has plunged 5.2 percent this month, more than twice as much as the second-biggest loser among 31 major currencies tracked by Bloomberg.

The peso, among the most-traded currencies in the world and traders’ favorite proxy to hedge against emerging-market risk, has fallen to unprecedented levels as polls show Democratic candidate Hillary Clinton’s lead over Republican Donald Trump is narrowing ahead of the U.S. presidential elections. The central bank last sold dollars directly to banks in February, when the peso was touching record lows, and said at the time that it would do so in the future to contain "disorderly" moves in markets. It hasn’t used the tool since.

Traders are testing the central bank’s intervention policy, and it’s “only a matter of time" before the peso hits 20 per dollar, said Win Thin, the global head of emerging market strategy at Brown Brothers Harriman & Co. Options traders may have positioned themselves in such a way that a drop past 20 per dollar would trigger further losses, he said.

Investors are concerned that monetary policy in Mexico and across the world might have reached the limit of what it can attain in terms of supporting markets, according to Chris Lawrence, a rates and currency strategist at Rabobank NA in New York.

“If central banks stop pumping liquidity into the global system then risky assets, probably all assets, will fall," he said. “The peso is the highest beta currency globally.”

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