LatAm FX: Carry window opens with caveats – BNY

BNY's Geoff Yu and David Tam note that a more dovish Federal Reserve and weaker U.S. labor data have created favorable conditions for Latin American carry trades, though challenges remain. They believe foreign exchange will lead the way, but sustained success hinges on domestic reforms and productivity gains to drive real returns.

The Federal Reserve's dovish stance and U.S. labor market weakness have paved the way, but idiosyncratic risk factors persist. With most Latin American central banks poised for rate cuts, traditional yield-driven strategies face hurdles. Nonetheless, the shift in commodity price correlations hints at a window for Latin American carry FX trades to prosper, contingent on leveraging this period of looser financial conditions to spur domestic reform and productivity improvements, ultimately translating into higher real returns.