The peso rallied above 12.4/US$ in the second half of March, and reached 12.17/US$ on April 8, reflecting an improvement in the US recovery outlook and domestic fundamentals. Inflation rose to 3.6% (y-o-y) in February, from 3.3% in January, but remains sharply below readings from six months ago. The Bank of Mexico cut rates on March 8, for the first time in almost four years, trimming 50bp off its overnight rate to 4%, citing the downturn in price pressures and a weak global economy. It stated, however, that the rate reduction was a pre-emptive step and did not represent the start of an easing cycle. The Mexican peso has received support from signs that the US economy, its dominant export and investment partner, is in better shape than Europe, which remains in recession. Furthermore, investor sentiment towards the country has strengthened since President Enrique Pena Nieto was elected in December 2012, pledging to make progress on structural reforms and to target monopolies in the economy which have restricted competition and growth. In a sign of political unity, the president managed to sign a pact with the two main opposition parties to increase reform momentum. In particular, plans to liberalise Pemex, the state-owned oil monopoly, should pave the way for much needed foreign investment and reverse the decline in crude oil production of recent years. The prospect of a ratings upgrade from Standard & Poor’s following an upturn in its outlook on Mexico’s sovereign credit standing has further enhanced support for the peso.
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