The Mexican peso surged to a 3-month high of 19.92898 against the dollar on Tuesday. The dramatic move in the peso was triggered by Banco de Mexico's surprise announcement regarding the launch of a $20 billion hedging program, which is aimed at curbing excessive volatility in the currency markets.
At the request of the Exchange Commission, the body responsible for exchange rate policy in the country, the Mexican central bank will be allowing financial institutions to purchase exchangeable hedges, which will be payable at maturity, from the central bank via an auction.
The first auction is scheduled to take place on March 6th, 2017, with a total of $1 billion up for grabs.
Banco de Mexico explains the offering:
"The latter feature of the instruments will make it possible to hedge against foreign exchange risks, without using international reserves."Mexican banks will also be able to then sell these instruments to different market participants, "in this way, the agents and sectors that need them the most will be able to acquire foreign exchange hedges of this type," said Banco de Mexico.
As the Mexican central bank puts it: the volatility of the USD/MXN currency pair has been out of control, and has not accurately reflected the “economic fundamentals” of the Mexican economy.
According to the press release, the new currency hedges will have a maximum maturity of no more than 12 months.
“The Bank of Mexico will renew the totality of the maturities of these instruments until such time as the Exchange Commission deems it appropriate.,“ said the bank.
The Exchange Commission also said additional instruments may be launched in the future to combat currency volatility:
“The Exchange Commission ratifies its commitment to monitor the conditions of the foreign exchange market and does not rule out the possibility of additional actions.”The currency markets reacted very violently to the news. Prior to the announcement, at 2:00 p.m. EST, the USD/MXN pair was trading at 20.40. Fifty minutes later, the USD/MXN was trading lower by 2.32% (a gain of 2.32 percent for the peso) at 19.92898.
At press time, the peso has given up some of the gains and is currently trading at 20.05 to the U.S dollar:
Bance de Mexico photo by Richard Cawood