Exchange Commission’s Announcement
Just a day after the Central Bank’s announcement about Governor Carstens staying on for another five months, the Exchange Commission announced that it will begin offering foreign exchange hedges payable in pesos.
The program will amount to USD$20 billion, and the main characteristics are:
Banks may make bids for the instruments and subsequently offer the hedges to other market participants.
The first auction will be held on Monday March 6th and amount to USD$1 billion in total.
The hedges will have a maximum maturity of 12 months, but Banco de México will renew all of the maturities on such transactions for as long as the Exchange Commission sees fit.
Following the release of the announcement, the spot rate appreciated to a P$19.93/USD$ low, or 2.3%. From the standpoint of the foreign exchange market alone, the news seems very positive. However, given the prevailing uncertainty, the Commission’s decision has two possible interpretations:
1. On the positive side, the Commission is providing an additional tool for controlling the exchange rate. The measure is an instrument for procuring a more orderly foreign exchange market without resorting to international reserves while at the same time reducing pressure on Banxico to raise rates, which could have an adverse impact on economic growth.
2. On the negative side, the news could mean that the Commission is preparing for a worse environment than the current one. In the release, the Commission mentions that strong exchange rate volatility in recent months is inconsistent with Mexico’s economic fundamentals; even so, it still decided to intervene. Furthermore, it should be recalled that the Commission had said that any intervention in the foreign exchange market would be discretionary, suggesting that the authorities expect a period of strong exchange rate volatility.
The announcement should be viewed with caution. There are several factors that could put great pressure on the exchange rate including an aggressive US fiscal policy or a new trade relationship with the US that does not favor Mexico. The Commission is likely taking preemptive measures in the face of a very tough period in terms of exchange rate volatility.