Latin American currencies are proving resilient against the US Dollar, and BNY's Geoff Yu believes this is due to a combination of strong balance-of-payments positions and attractive carry. Despite global equity markets' nervousness, Latin America's currency markets are holding their own, with a particular focus on the Mexican peso (MXN) and the Peruvian sol (PEN).
Yu highlights the region's positive carry setup, noting that the Federal Reserve's defensive stance against price risks and the potential for inflation to surprise on the downside in Mexico could further support the MXN. However, he also points out that the PEN is the only clearly under-owned currency in Latin America, which may limit its total return prospects compared to high-yielding peers in EMEA and APAC.
The article emphasizes the importance of balance-of-payments strength, suggesting that even with a less dovish Fed, Latin America has a significant buffer against potential outflows. This buffer is further supported by conflict-era inflows, which create a solid foundation for the region's currencies. Despite this, Yu notes that the current setup is surprising, as dollar hedges are at their lowest level this decade, yet Latin American currencies have not been significantly impacted.
In terms of economic data, the article mentions expected moderate gains in domestic demand, as indicated by Mexican retail sales and IGAE activity data. However, it also highlights Banxico's easing path, which remains intact despite high real rates relative to price risks. Biweekly CPI is expected to come in at 3.25% year-over-year, with little sequential growth in headline and core components.
Overall, Yu's analysis suggests that Latin American currencies are well-positioned to withstand potential US Dollar strength, thanks to their strong balance-of-payments positions and attractive carry. However, he also notes that the region's total return prospects may be limited compared to EMEA and APAC high-yielding peers, particularly due to the PEN's under-ownership.
This article provides a comprehensive overview of Latin American currencies' resilience against the US Dollar, offering insights into the region's economic fundamentals and the factors driving its currency markets. It also highlights the importance of carry and balance-of-payments strength in maintaining currency stability, even in the face of global market volatility.
