Mexican Peso Slumps to Record Low as Fears Persist After Fed Cut

(Bloomberg) -- The Mexican peso slumped to a record on Monday as the Federal Reserve’s emergency rate cut failed to pacify global financial markets.

The peso dropped 3.6% to 22.7354 per dollar as of 10:28 a.m. New York time after hitting an all-time low of 23.0782 as circuit breakers were triggered for U.S. stocks. Local markets were closed today, although the peso continues to trade overseas. It posted the worst performance among 24 emerging-market peers tracked by Bloomberg.

“Carry trade flows are still being unwound,” said Christian Lawrence, a New York-based strategist at Rabobank. It’s “probably nearly done now, but then the issue is those buyers wont be back for a while, not with volatility this high.”

Traders trimmed long peso positions for a sixth week as of March 10, the longest decline since June 2018, CFTC data showed.

The Bank of Mexico may need to do more to calm markets and rein in excessive swings, after offering $2 billion of FX hedges on Thursday, marking the first intervention since 2017.

The peso lost 8.3% last week in its biggest rout since November 2016. Central Bank Governor Alejandro Diaz de Leon said Friday that selling dollars into the spot market is a tool policy makers can use, though foreign-exchange hedge auctions are preferred as they don’t reduce the country’s international reserves.

With the Mexican peso down almost 14% in March, traders are quickly taking easing bets off the table. As of Friday’s close, the TIIE swap curve was pricing in less than 25 basis points of rate cuts in the rest of 2020, compared with almost 100 basis points by the end of February.

Even though Mexico’s policy rate will likely hover around 7%, among the highest in emerging markets, whether carry-seeking investors will return is an open question. Without their support, “the spotlight falls on fundamentals, which are not good in Mexico,” according to Rabobank’s Lawrence.

To contact the reporters on this story: George Lei in New York at glei3@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Alec D.B. McCabe

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