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Mexico announces forex hedge program, peso jumps 2%

Mexico Pesos
Susana Gonzalez | Bloomberg | Getty Images
Mexico Pesos

The Mexican peso jumped 2 percent against the U.S. dollar Tuesday after Mexican authorities announced a new currency intervention measure.

Mexico's foreign exchange commission said in an afternoon release that Banco de México, also known as Banxico, would offer up to $20 billion in foreign exchange hedges. The commission said the program will not use the central bank's international reserves, theoretically increasing the amount of dollars Banxico can use to support the peso.

Traders "know the central bank has more ammunition to intervene in the market if it weakens," said Andres Jaime, global FX and rates strategist at Barclays.

Jaime said the news should also force many traders to buy the peso after selling it short, or in expectation that it would fall further.

The Mexican peso leaped against the dollar, briefly breaking past 20 to hit its strongest since Nov. 10, 2016.

US dollar vs. Mexican peso intraday Tuesday

Source: FactSet. Y-axis inverted.

"In the past few months, the exchange rate between the peso and U.S. dollar has shown a large amount of volatility, one which is not consistent with the economic fundamentals of our country," the commission said, noting this volatility led to the implementation of this hedging instrument.

The first auction of the new instruments will be on March 6 for up to $1 billion, the commission also said.

Banxico has raised interest rates in an effort to support the currency.

The peso hit a record low against the dollar earlier this year as traders worried about the negative impact of U.S. President Donald Trump's tough trade policies on Mexico. However, those concerns have decreased in the last few weeks, supporting the peso's recovery.

—Reuters and CNBC's Fred Imbert and Antonio José Vielma contributed to this report.