For many US-based companies doing business in Mexico, the flip side of the boon in activity is the growing burden of a surging peso, raising the need for aggressive currency hedging strategies.

Multinational firms that moved operations to the US’s top trade partner — a trend known as nearshoring — are feeling squeezed as their exposure to the strong peso increases. For companies that move cash over the border, ranging from automotive suppliers to miners, that’s a reason to ramp up protections against swings in the currency.

“The ecosystem for the Mexican peso has got a lot more diversified,” said Phil Hermon, head of growth and execution for FX products at CME Group Inc. “There’s a lot more people now active and there are a lot more firms active in it than than ever before.”

There’s already evidence of increased hedging activity. Commercial traders, who tap the currency futures and options market for protection, increased peso shorts in April to the highest level in more than four years, some 145,000 contracts worth approximately $4.5 billion, according to recent data from the Commodity Futures Trading Commission and CME Group. While that position has been pared back in recent weeks, it still compares to a long-run weekly average of some 25,000 contracts short in CFTC data going back to 1995.

The greater need for protection comes alongside an impressive run-up in the peso. It’s the only major currency out of 16 tracked by Bloomberg this year to post a substantive gain against the US dollar. It is also fresh off the best annual run in at least a quarter-century.

At the same time, high yields on Mexican government bonds have been appealing to international traders looking to park cash. Plus, US-related revenues across major Mexican industries have surged over the past decade, according to MSCI Inc. The US now imports more from Mexico than from any other country in the world, supplanting China in 2023.

“Companies’ exposure to the peso has been increasing with friend-shoring,” said Amol Dhargalkar, chairman and managing partner at Chatham Financial Corp., a hedging advisory firm. “We’ve seen a real appreciation in the peso over the past year. That’s a pretty dramatic change on cost of goods sold for companies.”

Aptiv Plc, founded 30 years ago in Troy, Michigan, is one of the companies seeking protection. When the automotive parts supplier reported results earlier this month, it called out the impact of currencies — particularly the Mexican peso and the Chinese renminbi — on its operating income outlook for this year among other factors, lowering 2024 estimates by some $50 million. 

“Although many forecasts expect the peso to weaken over the course of the year, the 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 peso per dollar, Massaro said, nearly 9% stronger than the Mexican currency’s long-run average over the past decade. That mark also represents a level at which 90% of Aptiv’s 2024 peso exposure has been hedged, he said. The company declined to comment further.

At Capstone Copper Corp., the company’s mining business is particularly exposed to increases in the Mexican and Chilean pesos, since much of the firm’s commodity sales are booked in dollars but incur costs in local currencies.

The firm has a collar — a form of options trade that sets a floor and a ceiling on market exposure — in place, worth some 497 million Mexican pesos ($29.9 million), according to its latest earnings statement. Nonetheless, Chief Operating Officer Cashel Meagher said costs were up 12% year-over-year in part because of the stronger peso.

To be sure, other US companies with big operations in Mexico, especially those with more flexible pricing strategies, haven’t felt the need to hedge against peso’s strength yet.

“We’re moving around day by day with prices in the field,” said Bryan Giles, CFO at California-based Mission Produce Inc., a global distributor of avocados grown in Mexico. “We have the ability to flex pricing for customers, and in all honesty the variability of how we price avocados has more to do with supply and demand than foreign exchange.”