Bank of Mexico Sells Additional Dollar Hedges to Support Peso -- Update

By Anthony Harrup Features Dow Jones Newswires

The Bank of Mexico auctioned $500 million in dollar hedging contracts Tuesday, expanding its existing program from the current $5 billion in response to recent volatility that had sent the peso to a nine-month low against the U.S. dollar.

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The foreign exchange commission, which includes officials of the central bank and the finance ministry, cited recent volatility in the exchange rate and lack of liquidity in the market in its decision to increase the amount of hedges.

The central bank placed $250 million in 30-day nondeliverable forwards at an average exchange rate of 19.6256 to the dollar, and $250 million in 57-day forwards at 19.6918 per dollar. Demand was $255 million for the one-month and $375 million for the two-month contracts.

If the peso is weaker when the contracts mature, the central bank pays the difference in pesos, and if the local currency appreciates, the bank receives the difference. The hedges are a way for the central bank to support the exchange market without depleting Mexico's international reserves, which currently stand around $172.5 billion.

The hedging program for up to $20 billion was set up in February 2017 after the peso had sunk to record lows, weakening as far as 22 to the dollar. The bank sold an initial $1 billion in forwards, and later increased the amount to $5 billion between late October and early December. The bank rolls over the contracts as they expire.

The commission said Tuesday's decision is aimed at providing liquidity, and that it will take additional measures if needed to maintain an orderly market. The principal anchor for the value of the currency, however, will continue to be ensuring solid economic fundamentals, it said.

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The peso rallied briefly in Mexico City to around 19.57 to the dollar from 19.7385 Friday, but then gave back gains and was quoted mid-session at 19.8410.

"We expect several events to undermine the performance of the peso (at least during the first half of 2018), stressing the [North American Free Trade Agreement] negotiations, investors reshaping their strategies following the new U.S. fiscal scheme, hawkish rhetoric from the Federal Reserve and Mexico's 2018 electoral process," Grupo Financiero Banorte said in a note.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

December 26, 2017 14:05 ET (19:05 GMT)