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LatAm FX: Carry supports resilience against US Dollar - BNY

BNY’s Geoff Yu sees Latin American currencies underpinned by strong balance-of-payments positions and attractive carry, even as global equity nerves rise. Yu notes that conflict-era inflows have created a solid buffer against potential Dollar strength, while Banxico’s easing path and under-owned Peruvian Sol (PEN) stand out, though overall FX total return prospects lag EMEA (Europe, the Middle East, and Africa) and APAC (Asia-Pacific) high-yield peers.

Carry appeal and balance-of-payments strength

"We continue to see improvement in the carry environment despite increasing nervousness in equity markets. Given the current positioning profiles in equities, risk profiles in standard carry trades – especially dollar-funded – look even more attractive. Nonetheless, Latin America remains well-positioned in FX, and it’s easy to see why."

"On the one hand, the strength of the financial account in the region means that even with a less dovish Fed (unlikely at present), the region has a significant buffer for potential outflows should dollar preference rise. Considering current elevated dollar positioning, we see such risks as low in any case. However, the surprise in the current setup is that despite dollar hedges also being at their lowest level this decade, it hasn’t come at the expense of Latin American currencies, so the holdings case for the region isn’t strong either."

"Mexican retail sales (Tuesday) and IGAE (Thursday) activity data are expected to show moderate gains in domestic demand, but nothing to detract from Banxico’s easing path as real rates remain high relative to price risks. Biweekly CPI is expected to come in at 3.25% y/y with barely any sequential growth in headline and core components."

"We continue to see a positive carry setup. The Fed is on the defensive against price risks, and inflation can surprise to the downside in Mexico if greater pass-through materializes at current USD/MXN levels. Even so, we note that PEN is the only clearly underheld currency in Latin America, so direct risk reward for total return in Latin American FX is weaker than EMEA or APAC high-yielding peers."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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FXStreet Insights Team

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

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