Latam FX Talking: Carry trade interest dominates again
In a fresh indication of market dynamics, Latin American currencies are showcasing strong performance driven by renewed carry trade interest, as highlighted in recent commentary. Per the full note source, the Brazilian real is expected to maintain stability amid low volatility and decent economic indicators, while the Mexican peso faces challenges tied to US trade policies. Consensus targets remain moderately range-bound for USD/BRL and USD/MXN, with no major catalysts on the horizon over the next month, allowing traders to position based on current macroeconomic conditions.
What the desk is arguing
The desk posits that Latin American currencies, particularly the Brazilian real, are positioned to capitalize on the current carry trade enthusiasm. Per the full note source, Brazil's economic stability and attractive implied yields averaging 13% make the real a compelling choice, particularly in a low-volatility environment.
The most recent monetary policy stance from BACEN, with the rate cut to 14.25%, coupled with the outlook for inflation, also underscores a more stable domestic narrative for Brazil. In contrast, the Mexican peso has shown signs of vulnerability as the interest rate spread narrows, yet still maintains a neutral outlook against the dollar as US policy developments loom ahead.
Where it sits in our coverage
Currently, we see USD/BRL positioned at 5.10 with a consensus target range from various firms, including: - bofa: Targeting 5.15 - jpmorgan: Targeting 5.15 - citi: Targeting 4.75
This view aligns broadly with market sentiment as many institutions favor the Brazilian real's resilience. However, the desk's view appears optimistic relative to other firms like bofa, which suggest a slightly more cautious approach with a target at the higher end of the range.
How other firms see it
Several firms, including jpmorgan and citi, share a positive sentiment towards the Brazilian real given its perceived economic strength and attractive yields. In contrast, bofa highlights potential weaknesses in the peso due to trade uncertainties, suggesting a more guarded perspective.
Traders should also consider the USD/MXN trajectory as it operates within a range of 17.00/17.50, reflecting the broader implications of the Federal Reserve's monetary policy. The interplay between US interest rates and Latin American currency movements remains pivotal in ongoing assessments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Latin American currencies are attracting carry trade interest amid low volatility.
- 02The Brazilian real is expected to remain stable due to supportive economic indicators.
- 03The Mexican peso faces trade-related uncertainties that could impact its performance.
- 04Upcoming US policies could influence investor sentiment in the region.
Market implications
Monitor USD/BRL near the 5.20 resistance level, as sustained trading above this could signal further upside. The broader macro environment, particularly any updates regarding US trade policies, will be crucial for positioning Latin currencies in the near term.
Risks to this view
Key risks to this outlook include a significant spike in global oil prices or adverse developments in US trade negotiations, which could heighten volatility and negatively impact investor sentiment towards Latin currencies.
Articles Latam FX Talking: Carry trade interest dominates again Published 13:03 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Latin currencies are once again proving to be some of the top performers in the FX space. Low FX volatility is sending carry trade money into a region a little less exposed to the energy shock than EMEA and Asia. Despite the approaching presidential elections in October, we think the Brazilian real can remain stable and outperform the steep forward curve Chris Turner USMCA uncertainty weighs on the Mexican peso USD/BRL: Domestic story seems constructive Spot One month bias 1M 3M 6M 12M USD/BRL 5.1086 Mildly Bullish 5.15 5.15 5.15 4.75 USD/BRL has edged higher along with the broader dollar over the last couple of months, but looks to be holding under the 5.20 area.
Barring a major spike in oil prices or a large equity correction which would send volatility higher, these summer months should favour the real with its 13% implied yields. Domestically, the economy seems to be doing fine. BACEN recently cut the policy rate to 14.25% even though inflation is drifting further away from target.
The market doesn’t see the policy rate under 14%, however. In politics, President Lula still leads former President Bolsonaro in the polls. Watch out for 15 July, where US Section 301 tariffs pose a risk to the real.
USD/MXN: Heading into a range-bound summer Spot One month bias 1M 3M 6M 12M USD/MXN 17.48 Neutral 17.50 17.50 17.25 17.25 It looks like USD/MXN has put in a floor just above 17.00. Banxico has cut rates to 6.50% and the spread over the Fed policy rate, now at 275bp, is at the narrowest levels in a decade. It is unlikely to narrow any further and we would expect Banxico to follow, should the Fed hike after all.
Offering implied yields of around 6.70% makes the peso a modest high yielder, but less attractive than Brazil. Both countries, however, do have to deal with the US trade threat, where Mexico now faces uncertain annual renewals of the USMCA trade deal. USD/MXN can hold around the 17.50 area this summer and then perhaps at 17.25 later this year if the Fed doesn’t hike.
USD/CLP: Copper holds gains and limits peso’s downside Spot One month bias 1M 3M 6M 12M USD/CLP 924.95 Neutral 925.00 925.00 925.00 900.00 Copper, Chile’s chief export, continues to trade above $13000/MT and our commodities team expects it to stay there. Stocks of refined copper have been hoarded in the US ahead of potential tariffs. The ruling on that tariff has been repeatedly delayed and the feeling now in the mining community is that those stocks will not find their way back into the global system.
Firm copper prices should limit the downside for the peso and offset the risk of higher energy prices. That means the 940/950 area should limit the topside this summer for USD/CLP. Markets price the risk of another cut in Chile’s 4.50% policy rate.
But that seems unlikely until the Fed story resolves itself. Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and…
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