Who will cut rates first, Banxico (Mexico's Central Bank) or the Federal Reserve (US Central Bank)? With a 5.75% spread (favoring Mexico) of short-term interest rates, the carry trade has money flowing into the Mexican Peso. As both countries prepare for upcoming elections, there is sure to be volatility in both currencies.
Both countries face high inflation and uncertain monetary policy direction as we advance. The key to the Peso's strength will be which Central Bank cuts rates first. In 2024, Mexico will host a presidential election in June, and the US will host theirs in November. The race in both countries is close and will be watched closely by the world.
Mexico's GDP has shown positive performance for the past nine quarters as of December 2023. However, the December number was the lowest of the nine quarters, possibly signaling a slowdown of future growth.
How can traders take advantage of this information?
The Mexcian Peso trades on the spot Forex and the CMEGroup futures exchange. This article will refer to the June futures contract (M6M24). The difference is that the Forex market chart moves inversely to the futures markets.
Technical
In 2023, the Peso gained 15%, reaching a high of .05972 in September. A correction down into October saw prices bottom and continue to rally into the year-end. Since January 2024, the Peso has traded lower and recovered to about unchanged levels.
Source: Barchart
The dominant uptrend from 2023 remains as the market consolidates last year's gains. The contract's high closing price for the June Peso futures contract on January 08, 2024, is .05791, and breaking out of this trading range could quickly push the market to new contract highs. New contract highs or lows are as significant as 52-week highs and lows in the equities markets.
Traders in Financial Futures (TFF) Report
Source: CMEGroup
Leveraged Funds have held net long positions (higher blue bars) since May 2023. As the price (yellow line) peaked in September 2023, the Leveraged Funds reduced their long positions. In October, they began buying again and continued to expand their long positions.
Could their bullishness be what causes the price to break out of the 2023 trading range and continue to new contract highs?
Seasonal Pattern
Moore Research Center, Inc. (MRCI) has researched the Mexican Peso history and found that the market rallied from March until mid-April. The question becomes, was October a significant bottom for the Peso?
It's 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 well-informed and balanced trading choices.
Source: MRCI
MRCI research reveals the Mexican Peso price action's 15-year pattern (blue line). The most significant price increase occurred during the year's optimal seasonal window (yellow box). The seasonal window allows traders to confirm with other analyses that a bullish bias may occur during this time. Traders can enter the market and manage the trade until the end of the seasonal window. Or build a core position and trade in and out of it during the window.
MRCI research has shown that the Mexican Peso futures closed higher on approximately April 04 than on February 28 for 14 of the past 15 years (93%). During this time, four years never had a daily closing drawdown.
Source: MRCI
Like many currencies, the Mexican Peso exhibits end-of-financial quarter seasonal patterns.
In Closing
This article analyzes the potential impacts of monetary policy decisions by Mexico's central bank (Banxico) and the US Federal Reserve on the Mexican Peso. With a significant interest rate spread favoring Mexico, there's an influx of money into the Peso, impacting its strength. Both countries face uncertainties due to upcoming elections and high inflation. Traders can leverage this information by monitoring currency markets, mainly through spot Forex and futures exchanges like CMEGroup. Technical analysis indicates a consolidating market trend with the potential for breakout to new highs. Leveraged Funds' positions and seasonal patterns suggest a bullish bias, but traders should complement seasonal insights with other indicators for informed decision-making.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
