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LatAm carry appeal faces rising U.S. yields and a less predictable Fed
BNY says Latin America’s energy terms of trade could support currencies or duration again, but higher U.S. yields may keep hedge ratios elevated until Fed clarity improves.
FXStreet, citing Geoff Yu at BNY, said Latin American assets may benefit again from improved terms of trade tied to energy and other soft commodity exports, with “real-rate anchors” continuing to support both currencies and duration.
The note also cautioned that rising U.S. yields and a less predictable Federal Reserve are weighing on carry-trade momentum, so hedge ratios are likely to stay high even as some central banks remain aggressively hawkish.
BNY pointed to Banco de la República as an example, forecasting a 50 basis point rate hike to 12.50%, and said real rates are already above 6% while activity appears robust, with retail sales still expanding by double-digits annually and consumer confidence rebounding strongly in June.
BNY added that recent EM policy decisions have seen misses, including Bank Indonesia and the South African Reserve Bank choosing to hold despite upside inflation risk, and warned that a Fed approach that forgoes forward guidance could structurally raise hedging needs.