Something's not right!
Market participants sensed something unusual.
What's going to happen?
In the foreign exchange market, most transactions are conducted by commercial banks. They provide quotes and inquiries via telephone.
Generally, only three to four decimal places are needed.
However, Mexican banks operate differently; they provide three to five decimal places because the Mexican pegged to the US dollar has a fluctuation range of less than 4%.
For example, an institution wanting to sell US dollars calls to inquire about prices. Typically, the counterparty will answer "452-475," meaning the buying price is 0.00023 US dollars to 1 peso, and the selling price is also 0.00023 US dollars to 1 peso. The difference of 0.00023 is the exchange rate difference, which is charged by the currency exchange bank.
Typically, a bank's trading department profits from exchange rate differences by frequently buying and selling in the foreign exchange market. However, these exchange rate differences are small, so frequent trading is necessary to achieve satisfactory returns.
Currency traders quickly noticed an increasing number of sell orders for Mexican pesos in the market, while the corresponding buy orders did not increase much. This situation prompted them to rapidly lower peso quotes and widen the spread to earn greater profits.
This situation prompted them to continuously lower the price of the peso, widen the exchange rate difference, and thus increase profits.
As a result, the peso-dollar exchange rate rose steadily from a low of 1 peso to 0. dollars, eventually breaking through the 0. dollar mark.
The Mexican peso briefly surged to 3.4514 pesos to the US dollar.
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