Mexico Currency Hedges See Strong Demand as Pessimists Abound

(Bloomberg) -- Strong demand for contracts that protect from declines in Mexico's peso shows lingering concern the currency is vulnerable to a fresh selloff after a six-week rally.

In its first auction of foreign-exchange hedges, Mexico's central bank got $2 billion of bids for the $1 billion of securities it offered. Monday's sale marked the first time authorities have offered the non-deliverable forwards in an attempt to tame the volatility seen since Donald Trump entered the presidential race vowing to crack down on Mexican exports.

While the peso has surged 10 percent since falling to a record low in mid-January, most analysts forecast declines for the rest of the year as Trump threatens to rewrite the North American Free Trade Agreement and discourage U.S. companies from setting up factories in Mexico. The highest demand for the non-deliverable forwards was seen for the shortest-maturity contracts, a signal that investors expect the next month to be volatile.

“There was some very good demand," said Janneth Quiroz, an economist at Monex Grupo Financiero in Mexico City. “Many banks' clients are still afraid that the exchange rate will shoot up like we saw early this year."

The central bank announced the unprecedented auction two weeks ago, fueling further gains in the currency that was bolstered in recent weeks by a technical rebound and comments from U.S. government officials that were seen as conciliatory after Trump's campaign pledge to slap a 35 percent import tax on companies that moved operations across the border.

Policy makers offered six maturities of NDFs ranging from 30 to 360 days. While they are negotiated in dollars, the contracts are settled in the local currency, meaning they don't create a foreign-currency liability for the central bank. Officials have said they may auction as much as $20 billion of the contracts under the program announced Feb. 21.

Results “suggest that there was interest in taking advantage of the peso's current conditions to cover some risk positions,” said Alejandro Padilla, a foreign-exchange strategist at Banorte-Ixe in Mexico City.

To contact the reporter on this story: Isabella Cota in Mexico City at icota@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh