Mexico launches FX hedging program to prop up peso

Mexico's central bank (Banxico) announced the creation of a foreign exchange hedging program of up to US$20bn in order to increase the stability of the peso versus the US dollar.

In a release, Banxico said that in recent months "the peso exchange rate against the US dollar has shown high volatility, which is not consistent with the economic fundamentals of the country."

"This is the most important change in the approach to FX policy since the Tequila Crisis," Reuters reported Barclays economist Marco Oviedo as saying. "This is not a fixed exchange rate, but it definitely has an important impact on the level of the exchange rate," he said.

With tenors of up to 12 months, the FX hedges will be auctioned to financial institutions according to rules to be published in the official gazette. The first auction, which will be for US$1bn, is set for March 6.

As settlements will be in local currency, the program will not use Mexico's foreign reserves, said Banxico.