Market prefers exchange hedges over financing in dollars

The Bank of Mexico allocated only a quarter of the 200 million it offered in the financing auction in dollars scheduled for this month, which is referenced in the swap line open with the Federal Reserve.

The objective of this operation was to partially renew the maturities of financing in dollars in the United States market, auctioned in August, as well as to offer additional liquidity in dollars.

According to information from the Bank of Mexico, the 50 million dollars placed in loans maturing on February 4, 2022 were assigned to a single bidder who was also the only one who was presented.

According to the deputy director of economic analysis at Monex, Janneth Quiroz, market participants prefer for now to participate in foreign exchange hedging auctions, where demand has increased.

He cited the foreign exchange forwards auctions on Monday, November 8 and Tuesday, November 9, to refer that there has been an increase in demand that exceeded by 3.3 and 3.8 times, respectively, the amounts offered.

It is not so much that there is no appetite to hedge in dollars, but that they are using other types of instruments, he stressed.

Exchange hedges

On November 8, at the instruction of the Foreign Exchange Commission, Banco de México offered 200 million dollars in exchange hedges, and the demand was for 760 million dollars.

In the auction on November 9, the Bank of Mexico offered 430 million dollars in coverage but the demand was for 1.42 billion.

This demand has increased compared to what was seen at the beginning of last month when risk aversion moderated significantly, the strategist said.

This instrument of exchange forwards payable in pesos allows Banxico to participate as a market player to try to break the cycle of tension on the peso.

The bank offers a number of hedges for a specified term and the bidders demand a proportion of these hedges at an exchange rate determined by them.

The participant to whom the coverage is awarded does not physically receive the dollars, but the equivalent in pesos to which the allocation was weighted, so that if the exchange rate remains in line with the agreed date or below, on the expiration date, the bidder.

Volatility like none

When comparing this year’s foreign exchange hedging auctions with those of 2020, a higher demand is observed.

Information from Banco de México shows that last year, they offered 44.207 million dollars in exchange forwards, which had a demand of 162.768 million dollars. This between January 2 and November 9 of last year, when the shock of the pandemic was faced and uncertainty persisted due to the unprecedented closure of economies.

For this year, in the same period, the supply of exchange hedges has been 48,726 million dollars, with a demand of 212,402 million dollars.

The Monex specialist points out that this preference for exchange hedges is much more associated with the difference between the underlying price at which it is contracted at the time, and the possibility of winning when the term expires.

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