According to BNY's Geoff Yu, Latin American currencies have demonstrated relative resilience even as iFlow data indicates a decline in positions in high-yielding currencies due to a shifting Federal Reserve policy environment [1]. Yu notes that while there is a steady reduction in carry holdings, this does not equate to outright liquidation, and LatAm currencies remain the most resilient group under current conditions [1].
The report highlights that improved terms of trade, particularly for Brazil and Chile, are supporting regional currencies. Export values for these countries have reached multi-year highs, driven by the ongoing conflict and other structural factors, which helps offset the increased global preference for the US dollar [1]. However, Yu cautions that central banks in the region must remain vigilant and ensure that real rates adjust appropriately to the new Fed dynamics to maintain currency support [1].
Looking ahead, rate decisions in Peru, Chile, and Brazil are expected in the next trading week, but no major surprises are anticipated. Despite this, Latin American currencies will need to closely monitor elevated short-term dollar preference, as the need to generate dollar liquidity for share sales and US-market offerings remains high [1]. The current yield and policy outlook are seen as sufficient to prevent large-scale liquidation, but attracting fresh inflows to ease onshore financial conditions may require more hawkish policy decisions from regional central banks [1].
In the FX markets, LatAm carry trades and fixed income positions are described as the last expression of 'risk-on' sentiment, especially as cross-border dollar hedges have unwound previous excess short positions [1].
CONCLUSION
Latin American currencies are holding up well despite declining carry positions and a stronger dollar environment, supported by robust export values in countries like Brazil and Chile. However, to attract new inflows and maintain supportive financial conditions, regional central banks may need to adopt a more hawkish stance in response to evolving Fed policy.