- On Thursday, the FX Commission announced a cut in its hedge programme settled in pesos, which has been in place since 2017.
- The programme consists of auctions of hedges, with settlement of currency differentials at maturity in MXN, with tenors no longer than 12M. In effect, it is an NDF programme in which Banxico sells USD in the forward market, resulting in the financial counterparty simultaneously buying them on the spot. The total outstanding currently stands at USD7,491mn.
- As of September 2023, Banxico will renew hedges with maturity of 1-3 months one more time, and for 50% of the amount outstanding. For operations with an original term of six months, on the renewal date, the maturity will be reduced to one month and will only apply to 50% of the amount. Finally, operations with an original maturity of nine and 12 months will be left to fully expire.
- While the USDMXN reacted strongly to the news, the initial spike was not justified, as the impact should be low. The CB is acknowledging MXN strength, and that this kind of "intervention" is not needed, now. We believe the market response to the announcement will be short-lived. As we have mentioned in previous reports, the MXN outperformance has scope to continue in the near term, but we expect it to depreciate by year-end and into 2024.
- In terms of the USDMXN forward curve implications, the impact should be low as the daily amount that they will stop renewing is not significant for the size of the market. The main impact would be in the basis. However, the daily renewal amount is low compared to the daily FX swap traded amount. Hence, the distortion in the implied rates will most likely prevail until USD excess liquidity conditions normalise.