The Mexican peso tumbled on Monday for a third consecutive day to its weakest since a surprise interest rate hike in February aimed at fending off speculators.
Fears that Britain may be on the verge of voting to leave the European Union next week have sent investors scurrying for the safety of U.S. Treasuries, weighing on emerging market assets. Traders also held back risky bets ahead of a U.S. Federal Reserve meeting this week, though most believe the central bank will stand pat.
The Mexican peso fell by as much as 1 percent to 18.8275 to the dollar. It later pared losses to trade at 18.76 to the dollar, 0.7 percent weaker on the day. It has underperformed its Latin American peers for months, dropping 8.4 percent so far this year.
The Colombian peso , whose performance is also greatly influenced by movements in oil, strengthened 6 percent in the period.
The Mexican central bank reacted in an impromptu meeting in February by hiking rates and directly selling dollar to banks. This assuaged investors for a while, but the currency soon resumed its decline as worries mounted over the global economy and weakness in oil. Central bank governor Agustín Carstens said last month the peso is not seeing a new speculative attack despite the recent slump, suggesting he was reluctant to make another surprise move and prompting investors to pare back bets on further policy tightening.
But yields on Mexican interest rate swaps have spiked back in the last three sessions of peso losses as investors bet Mexico's central bank could hike interest rates in its next scheduled monetary policy meeting on June 30. Many investors use the highly liquid Mexican peso, the only Latin American currency which trades 24 hours a day, as a way to hedge their exposure to the wider region.
Nomura Securities analyst Benito Berber highlighted the risk of policies curtailing Mexico-U.S. financial flows if Donald Trump becomes president, as well as shrinking government revenues from state-controlled oil company Pemex. "We believe that the central bank would not have sufficient tools to stabilize the currency if these shocks were to hit the economy, particularly if they occurred simultaneously," Berber wrote in a client note.
