Protect yourselves from the 'superweight': Multinational companies seek a shield against the Mexican currency

For many US-based companies doing business in Mexico, the flip side of the activity advantage is the increasing burden of a rising Mexican pesowhich increases the need for aggressive currency hedging strategies.

Multinational companies that have moved their operations to the United States' main trading partner (a trend known as nearshoring) are feeling pressure as their exposure to the strong peso increases. For companies that move cash across the border, from auto suppliers to miners, that's one reason to increase protections against currency swings.

“The Mexican peso ecosystem has become much more diversified,” said Phil Hermon, head of FX product growth and execution at CME Group Inc. “There are now many more people active and many more companies active in it.” than ever before.”

There is already evidence of increased hedging activity. Traders, who turn to the currency futures and options market to protect themselves, increased short sales in pesos in April to the highest level in more than four years, some 145,000 contracts worth approximately $4.5 billion, according to data. recent reports from the Commodity Futures Trading Commission and CME Group. While that position has narrowed in recent weeks, it still compares to a long-term weekly average of about 25,000 short contracts based on CFTC data dating back to 1995.

The increased need for protection is accompanied by an impressive weight gain. It is the only major currency of the 16 tracked by Bloomberg this year to post a substantial gain against the US dollar. It also just recorded its best annual streak in at least a quarter-century.

At the same time, high yields on Mexican government bonds have proven attractive to international traders looking to accumulate cash. Additionally, U.S.-related revenues in major Mexican industries have increased over the past decade, according to MSCI Inc. The United States now imports more from Mexico than from any other country in the worldsupplanting China in 2023.

“Companies' exposure to the peso has been increasing with support from friends,” said Amol Dhargalkar, president and managing partner of Chatham Financial, a hedging advisory firm. “We have seen real appreciation of the peso over the past year. “This is a pretty dramatic change in the cost of goods sold for companies.”

Aptiv Plc, founded 30 years ago in Troy, Michigan, is one of the companies seeking protection. When the auto parts supplier reported its results earlier this month, it highlighted the impact of currencies (particularly the Mexican peso and the Chinese renminbi) on its operating income outlook for this year, among other factors, lowering estimates for 2024 at about 50 million dollars.

“Although many forecasters expect the peso to weaken throughout the yearthe peso has remained stronger than our initial expectations,” Chief Financial Officer Joseph Massaro told analysts.

Aptiv has updated its guidance to reflect an exchange rate of 17 pesos per dollar, Massaro said, almost 9 percent stronger than the long-term average of the Mexican currency over the last decade. That mark also represents a level at which 90 percent of Aptiv's weight exposure in 2024 has been hedged, he said. The company declined to comment further.

At Capstone Copper, the company's mining business is particularly exposed to increases in the Mexican and Chilean pesos, as much of the company's raw material sales are accounted for in dollars but incur costs in local currencies.

The company has a collar (a form of options trading that establishes a floor and ceiling on market exposure) worth about 497 million Mexican pesos ($29.9 million), according to its latest earnings report. . However, chief operating officer Cashel Meagher said costs increased 12 percent year over year in part due to the weight strengthening.

To be sure, other U.S. companies with large operations in Mexico, especially those with more flexible pricing strategies, have not yet felt the need to protect themselves against the strength of the peso.

“We move day by day with prices in the field,” said Bryan Giles, chief financial officer of California-based Mission Produce, a global distributor of avocados grown in Mexico. “We have the ability to make prices more flexible for customers, and in all honesty, the variability in how we price avocados has more to do with supply and demand than currency.”