Mexico's foreign exchange commission said Wednesday that the central bank will increase the amount of dollar hedges it sells in response to the recent weakening of the peso, which is trading at a six-month low against the U.S. dollar amid jitters about the future of the North American Free Trade Agreement.
The commission, made up of officials from the Bank of Mexico and the Finance Ministry, said the central bank will offer an additional $4 billion in hedges, beginning Thursday with an auction for $1 billion.
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The hedging program for up to $20 billion was established in February after the peso had sunk to record lows against the dollar. The central bank sold an initial $1 billion in different maturities, and has rolled over the contracts as they expired.
The hedges are in the form of nondeliverable forwards. If the peso depreciates against the dollar by the end of the contract, the central bank pays the difference in pesos, and if the local currency appreciates, the bank receives the difference. The contracts are a way for the central bank to support the exchange market without depleting Mexico's international reserves, which currently stand around $173 billion.
"Recently, the exchange market has registered periods of increased volatility, which has been reflected in a depreciation of the national currency against the dollar and in a slight deterioration in operating conditions in the market," the foreign exchange commission said.
The commission attributed the volatility to uncertainty over the ongoing renegotiation of Nafta and expectations of further interest-rate increases by the U.S. Federal Reserve.
"In coming months new bouts of volatility in national financial markets can't be ruled out given the complex environment the country is facing," it said.
The peso, which hit a six-month low around 19.27 to the dollar early Wednesday, rallied on the announcement and was recently quoted in Mexico City at 19.0025.
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(END) Dow Jones Newswires
October 25, 2017 10:30 ET (14:30 GMT)