Mexico’s peso falls again despite currency hedge auctions

Susana Gonzalez | Bloomberg | Getty Images

Mexican one thousand pesos bills are run through a counting machine inside a currency exchange store in Mexico City, Mexico.

Mexico’s central bank sold an additional $500 million in foreign exchange hedges on Tuesday to support the peso amid uncertainty over the economic outlook, though the measures provided only fleeting relief for the currency, which fell further.

The peso has slumped to its lowest level in almost 10 months against the dollar due to concerns over inflation and the potential impact on Mexico of new U.S. corporate tax cuts.

The peso initially rose by more than 0.7 percent against the dollar on Tuesday after Mexico’s currency commission announced the extra auctions, which were drawn from a $20 billion program set up in February to reduce exchange rate volatility.

But the currency later reversed those gains and by 2:52 p.m. EST it had fallen by 1.03 percent to 19.90 per dollar, the lowest level since March 3, adding to losses it suffered last week.

U.S. President Donald Trump signed a tax overhaul into law on Friday that cut the corporate tax rate to 21 percent from 35 percent, fueling worries that Mexico will lose out on investment
to its northern neighbor.

Mexico’s finance ministry is evaluating whether to make fiscal changes in response.

Trump’s threats to tear up the North American Free Trade Agreement (NAFTA) if he cannot renegotiate it in favor of the United States have also weighed on the peso. NAFTA underpins
much of Mexico’s foreign trade.

Mexico’s presidential election due in July 2018 has stoked further uncertainty, and analysts say the peso could see extended periods of volatility in coming weeks.

“The high level of uncertainty about issues like the presidential elections in Mexico and the renegotiation of NAFTA will continue to pose risks for the U.S. dollar-Mexican peso exchange rate,” bank Ve Por Mas said in a research note.

“We believe the Bank of Mexico will maintain a restrictive monetary policy and continue to implement measures like today to contribute to a more stable environment for financial markets.”

The central bank said it received bids worth $375 million for the $250 million in 57-day hedges put up for auction, and bids worth $255 million for the $250 million in 30-day hedges.

In a separate auction to renew 60-day currency hedges that was scheduled weeks ago, Mexico received bids worth $600 million for another $300 million on offer.