Latin American currencies are proving their resilience against the US Dollar, despite global equity market jitters. This phenomenon can be attributed to several factors, including strong balance-of-payments positions and attractive carry. Geoff Yu from BNY highlights the region's ability to withstand potential outflows, even with a less dovish Federal Reserve, thanks to its robust financial account. The current setup is intriguing, as Latin American currencies have managed to maintain their value despite low dollar hedges, indicating a strong case for holding these currencies. Yu's analysis focuses on Mexico and Peru, with Banxico's easing path and the under-owned Peruvian Sol (PEN) standing out. However, he notes that overall FX total return prospects lag EMEA and APAC high-yield peers, suggesting a need for further exploration of the region's potential.
The carry appeal in Latin America is particularly interesting. Despite the increasing nervousness in equity markets, the region's carry trades, especially dollar-funded ones, remain attractive. The Fed's defensive stance against price risks and the potential for inflation to surprise to the downside in Mexico further enhance the carry setup. Nevertheless, Yu points out that PEN is the only clearly under-owned currency in Latin America, which weakens the direct risk-reward for total return in Latin American FX compared to EMEA and APAC high-yielding peers.
The article also mentions the upcoming release of Mexican retail sales and IGAE activity data, which are expected to show moderate gains in domestic demand. This, coupled with Banxico's easing path and high real rates relative to price risks, suggests a positive outlook for the region. However, the overall FX total return prospects remain a concern, indicating a need for further analysis and exploration of the region's potential.
In my opinion, the resilience of Latin American currencies against the US Dollar is a fascinating development. The region's strong balance-of-payments positions and attractive carry provide a solid foundation for its currency values. However, the comparison with EMEA and APAC high-yield peers highlights the need for further improvement in FX total return prospects. This raises a deeper question about the region's potential for growth and the factors that could influence its currency values in the long term. The article's mention of Banxico's easing path and the under-owned PEN adds an interesting layer to the discussion, suggesting that there are still hidden gems to be discovered in Latin American FX.
