Bank of Mexico ups currency hedges on Nafta, Fed-induced volatility
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The U.S. dollar registered a sharp drop against the Mexican peso on Wednesday, after Mexico's currency commission said it would increase the amount of dollars it sells in foreign currency hedges due to market volatility.
The dollar-peso pair fell to a two-day low of 18.9839 pesos following an announcement issued by the Bank of Mexico. One dollar last bought 19.0264 pesos. Earlier, the buck had traded at more than five-month high versus the Mexican currency.
The commission, which includes members of the central bank and the ministry of finance, said the hedges will grow by $4 billion, according to the statement (http://www.banxico.org.mx/informacion-para-la-prensa/comunicados/politica-cambiaria/comision-de-cambios/%7BFFD72B9A-4550-ACD5-FB7E-EB8CFC2E0CD6%7D.pdf). The commission in February announced a program for hedges of as much as $20 billion.
According to The Wall Street Journal (https://www.wsj.com/articles/mexico-moves-to-shore-up-peso-with-increased-dollar-hedges-1508940943), the hedges are in the form of nondeliverable forwards. The central bank sold an initial $1 billion in different maturities, rolling over the contracts as they expired.
The statement cited the volatility around the renegotiation of the North American Free Trade Agreement between Mexico, Canada and the U.S., as well as the Federal Reserve's monetary policy normalization as reasons.
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Mexico is assumed to bear the brunt of any meaningful Nafta changes.
Read:Mexican peso holds near 5-month low amid uncertainty over Nafta (http://www.marketwatch.com/story/mexican-peso-holds-near-5-month-low-amid-uncertainty-over-nafta-2017-10-11)
Meanwhile the Federal Reserve is expected to raise its interest rate again in December, while it has also begun to unwind its swollen $4.5 trillion post-Financial Crisis balance sheet--a move that could be detrimental to emerging market currencies because it would push the dollar higher.
Also read:Emerging market investors brace for shrinking Fed balance sheet (http://www.marketwatch.com/story/heres-what-the-fed-unwind-means-for-em-currencies-2017-10-04)
(END) Dow Jones Newswires
October 25, 2017 17:16 ET (21:16 GMT)