Latin America: Duration favored over carry – BNY
Geoff Yu at BNY sees Brazil and Mexico operating in a more comfortable policy environment after the Fed decision, with anchored United States (US) front-end yields supporting emerging-market duration.
BNY's Geoff Yu suggests that Brazil and Mexico are experiencing a more stable policy environment following the Fed's decision. Strong US front-end yields provide a solid foundation for Latin American duration, as EM options are crowded and offer limited upside. Improved US real rates and a weaker dollar enhance the inflation outlook via the import channel for regional assets.
Central bank decisions in Brazil and Mexico may occur in a slightly more comfortable climate due to the market's reaction to the Fed's move. However, selecting assets in the region remains difficult. Although the global carry trade has not gained much traction due to cross-asset volatility and geopolitical challenges, Latin American sovereign debt appears to have greater potential.
The decline in US real rates and the weakening dollar have enhanced risk-reward, but Latin American paper underperformed in the last month, presenting clear rebalancing opportunities by month-end. With lower hedge ratios than anticipated, buying some FX exposure could be advantageous. The GBP/USD pair sees dip-buyers at the start of the week, climbing toward a three-month high.
The US Dollar faces selling pressure, favoring bullish traders. The EUR/USD pair strengthens to around 1.1575. Gold gains traction after bouncing from a one-week low, but struggles to capitalize on momentum beyond $4,400. Cardano (ADA) nears a key support zone, trading at $0.177, after a 10% drop from the previous week. Weakening momentum and bearish metrics suggest further losses if ADA dips below the support level.
The US Dollar's fate remains uncertain amid ongoing geopolitical tensions and disappointing domestic data, which may prevent further Fed tightening.
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