LatAm FX: Carry window opens with caveats – BNY

BNY’s Geoff Yu and David Tam argue that a more dovish Federal Reserve (Fed) and weaker United States (US) labor data have improved conditions for Latin American (LatAm) carry trades, but broken correlations with commodities and lingering inflation risks limit momentum. They see FX as the first beneficiary of easier financial conditions, while stressing that sustained performance requires domestic reforms and better productivity to enhance real returns.

Carry appeal tied to reforms and FX

"The dovish Fed and weaker U.S. labor market on Friday have created the necessary conditions for carry to perform, but idiosyncratic risk matters."

"With most Latin American central banks looking to hold or cut rates, traditional yield-driven flows will struggle."

"However, the correlation shift suggests the market is seeing improved commodity prices as a positive driver, and a window exists for Latin American carry FX to perform."

"Much will depend on using this window of looser financial conditions to accelerate domestic reform, improve productivity to boost real returns."

"FX is the first mover, but validation will come in duration."