BNY's Geoff Yu highlights that Latin American (LatAm) currencies have been the standout performers among Emerging Markets (EM) foreign exchange, with strong holdings maintained throughout the recent conflict, supported by attractive nominal and real interest rates [1]. According to Yu, LatAm currencies delivered a 'tremendous quarter' and were the best-bought region, with no currency moving into underheld territory during the conflict [1].
Despite these strong fundamentals, Yu cautions that if the ceasefire holds and risk appetite broadens, investors may rotate flows into cheaper Asia-Pacific (APAC) and Europe, Middle East, and Africa (EMEA) assets, which could limit further upside for LatAm FX [1]. He notes that while the recovery in risk sentiment is still tentative, EM FX holdings are gradually picking up, but performance remains uneven across regions [1].
Yu also points out that the dollar has faced cross-border pressure due to hedging demand, which was prominent in January and February and has re-emerged since the ceasefire [1]. He adds that the potential for risk rotation could accelerate as USD funding costs progressively decrease, making APAC and EMEA assets more attractive from a valuation perspective [1].
Importantly, Yu clarifies that this shift in flows does not necessarily mean a deterioration in carry for LatAm currencies, which would require significant currency sales, but it does suggest that further gains may be capped if investors seek opportunities elsewhere [1].
CONCLUSION
Latin American currencies have outperformed their EM peers, but BNY warns that positioning risks are rising as investors may rotate into cheaper APAC and EMEA assets if risk appetite improves. While fundamentals remain solid, the potential for further gains in LatAm FX could be limited by shifting flows and changing market dynamics.