Efforts to support the Mexican peso amid a slump that has seen it trading at around 20 to the US dollar have failed to apply the brakes on the tumbling currency.
The Bank of México (Banxico) auctioned off an unscheduled US $500 million in foreign exchange hedges yesterday, a measure designed to ease pressure on the peso. But it only provided brief respite before the currency slumped again to end the day at 20.15 pesos per dollar.
The central bank took the decision on the advice of the Foreign Exchange Commission, a body made up of officials from the Finance Secretariat (SHCP) and Banxico that is responsible for foreign exchange policy in Mexico.
It explained its motivations to intervene via press release.
“With the objective of fostering better liquidity conditions, better price discovery and orderly operation [of the exchange market], the commission has decided to instruct the Bank of México to sell exchangeable currency hedges today [yesterday] for the value in national currency of US $500 million,” it said.
The central bank placed US $250 million in a 30-day forward contract and the other US $250 million in a 57-day forward contract.
If the peso has declined further by the time the contracts mature, Banxico will have to pay the difference in pesos but if the currency goes up, it will receive the difference.
The measure allows the central bank to support the exchange market without eating into Mexico’s international reserves, currently valued at around US $172.5 billion.
The intervention followed the peso depreciating to its lowest level in nine months last Friday.
Analysts have attributed the dip to high inflation, the threat to investment posed by tax reform in the United States and government corruption scandals that could benefit presidential aspirant Andrés Manuel López Obrador.
But analysts from Banorte-Ixe said that yesterday’s measure showed that the SHCP and Banxico recognized that the recent increase in volatility was largely the result of the US $1.5 trillion tax cut package signed into law last week by United States President Donald Trump.
The chief economic analyst at Banco Base, Gabriela Siller, said the exchange rate would remain vulnerable in 2018 due to speculation related to the July 1 presidential election.
“The first half of 2018 is shaping up as a period of greater exchange volatility because of the presidential elections,” she said, adding that uncertainty surrounding the renegotiation of the North American Free Trade Agreement (NAFTA) was another factor.
Bank of México Governor Alejandro Díaz de León said in an interview published by the newspaper El Financiero today that the peso faces an “adverse environment” in 2018 due to U.S. fiscal reform, NAFTA renegotiations and the Mexican presidential election.
The SHCP and Banxico will continue to closely monitor the foreign exchange market and some analysts believe that they will continue to intervene in the same way as yesterday if required.
In February, the Foreign Exchange Commission announced a US $20-billion hedging program to enable a more orderly functioning of the foreign exchange market.
The move came a month after the peso plunged to 22 pesos to the US dollar just before President Trump was sworn in.