Who will cut interest rates first, Banxico (Mexico's central bank) or the Federal Reserve (US central bank)? With a spread of 5.75% (favoring Mexico) of short-term interest rates, the carry trade results in money flowing into the Mexican peso. As both countries prepare for the upcoming elections, there is sure to be volatility in both currencies.
Both countries face high inflation and an uncertain direction of monetary policy as they move forward. The key to the peso's strength will lie in which central bank cuts rates first. In 2024, presidential elections will take place in June in Mexico and in November in the USA. The race in both countries is close and is being closely watched by the whole world.
Mexico's GDP has developed positively in the last nine quarters (as of December 2023). However, December's reading was the lowest of the nine quarters, potentially signaling a slowdown in future growth.
How can traders use this information?
The Mexican peso is traded on the spot foreign exchange market and the CMEGroup futures exchange. This article refers to the June futures contract (M6M24). The difference is that the Forex market chart moves in the opposite direction to the futures markets.
Technically
In 2023, the peso rose 15%, reaching a peak of 0.05972 in September. A correction into October caused prices to bottom and continue to rise until the end of the year. Since January 2024, the peso has been trading lower and recovering to roughly unchanged levels. bar graph
Source: Barchart
The prevailing uptrend from 2023 remains in place as the market consolidates last year's gains. The highest closing price for the June peso futures contract on January 8, 2024 is 0.05791, and a breakout of this trading range could quickly push the market to new contract highs. New contract highs or lows are just as significant in stock markets as 52-week highs and lows.
Traders in Financial Futures (TFF) report. 
bar graph
Source: CMEGroup
Leveraged funds have been net long (higher blue bars) since May 2023. When the price (yellow line) peaked in September 2023, the leveraged funds reduced their long positions. They started buying again in October and continued to increase their long positions.
Could its uptrend cause the price to break out of the 2023 trading range and continue to make new contract highs?
Seasonal pattern
The Moore Research Center, Inc. (MRCI) examined the history of the Mexican peso and found that the market rallied from March to mid-April. The question arises: was October a significant low point for the peso?
It is important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies and market conditions to make informed and balanced trading decisions.
bar graph
Source: MRCI
MRCI research shows the 15-year pattern of Mexican peso price movement (blue line). The most significant price increase occurred in the optimal seasonal window of the year (yellow box). The seasonal window allows traders to confirm that a bullish bias may occur during this period using other analysis. Traders can enter the market and manage trading until the end of the season window. Or build a core position and trade in and out during the window.
MRCI research has shown that Mexican peso futures closed higher around April 4th than they did on February 28th in 14 of the last 15 years (93%). During this period, there was never a daily closing decline in four years. 
bar graph
Source: MRCI
Like many other currencies, the Mexican peso is showing seasonal patterns as the financial quarter ends.
Finally
This article analyzes the possible impact of monetary policy decisions by the Mexican Central Bank (Banxico) and the US Federal Reserve on the Mexican peso. Due to the significant interest rate spread in favor of Mexico, there is an inflow of money into the peso, which affects its strength. Both countries face uncertainties due to upcoming elections and high inflation. Traders can use this information by monitoring the foreign exchange markets, primarily through spot foreign exchange and futures exchanges such as CMEGroup. Technical analysis suggests a consolidating market trend with the potential for a breakout to new highs. Leveraged funds' positions and seasonal patterns suggest a bullish bias, but traders should complement seasonal insights with other indicators to enable informed decision making.
At the time of publication, Don Dawson did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, please see Barchart's disclosure policy here.
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