The Bank of Mexico has made the decision to reduce its currency hedging program, which was initially introduced in 2017 in response to high peso volatility. The program was created by the foreign exchange commission, consisting of officials from the Finance Ministry and the central bank, as a means to mitigate the impact of market turbulence experienced during the beginning of the Trump administration.
However, due to improved market conditions, a stable economy, and decreased international market turmoil, the need for the hedging program has diminished. Banks and other entities are now able to fulfill their dollar needs directly in the market.
Despite the recent weakening of the peso to 17.03 against the U.S. dollar from 16.74, experts believe that this is merely a temporary reaction and not indicative of a return to volatility. Gabriela Siller, head of analysis at Banco Base, stated that the exchange market is functioning smoothly and that the hedging program is no longer necessary.
The hedging program originally employed nondeliverable forwards, which involved differences payable in pesos, to support the peso without resorting to direct dollar sales that would deplete the country’s foreign reserves. The central bank has invested $5.5 billion in 2017 and an additional $2 billion in 2020 in these hedges and has been renewing the contracts as they expire.
Starting from September, the central bank will be renewing the forward contracts one last time at 50% of the original amount. It will also replace six-month contracts with one-month contracts, subject to a single renewal at 50%. Furthermore, nine-month and 12-month contracts will be allowed to expire.
Although the hedging program will be scaled back, the exchange commission reassures that it will still be available if needed, with a capacity of up to $30 billion.