The Banco de Mexico held its target interbank overnight rate at 4.5 percent. It marks the nearly the three and a half anniversary since the central bank, led by Augustin Carstens, cut its key policy rate to a record low in the depths of the Great Recession. The past several meetings and statements from the Bank have focused on structural downside risks to the global economy, namely the fiscal cliff and the European sovereign debt crisis. Another recurring theme has been the slightly above target inflation, which crept up to close to five percent in the summer of last year. The Bank has reaffirmed in many statements that this has been due to rising energy and commodity prices, and a weaker peso driven by bouts of risk aversion. Core inflation has remained subdued. Despite this, the Bank has remained steadfast in its commitment to maintain inflation expectations, and has threatened to raise rates even if rises in headline inflation were largely due to external factors. This month, with headline inflation falling comfortably to 3.57 perecent, comfortably within target, the bank shifted its focus towards growth. Namely, the statement hinted at a possible rate cut, if inflation remains within target and growth slows.
The USD was broadly firmer today, gaining against most of its major peers. AUD/USD dipped back below 1.05 as the Aussie struggles to gain a foothold above 1.0550. The Canadian Dollar dipped, dropping nearly 50 pips on the New York open against its American counterpart before paring nearly half those losses. Sterling continues to be under pressure, dropping down below 1.59 to the dollar on bad UK consumer confidence numbers and decline demand for safe-haven assets. The EUR/USD traded briefly below the 1.33 level, but since popped back up to 1.3320. 1.34 continues to be a brick wall for the pair. The Yen has traded sideways, but the dollar has held its gains against the Japanese currency, trading above the critical 90 level.
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