Geoff Yu at BNY highlights that Latin American (LatAm) assets are poised to benefit from improved terms of trade for energy and soft commodity exporters, with strong real-rate anchors supporting both currencies and duration instruments [1]. He notes that the initial phase of the recent conflict led to a significant uplift for energy exporters in Q2, and anticipates a similar outcome if current conditions persist [1]. Governments in the region are likely to prefer duration over currency appreciation to gain more fiscal space [1].
Despite these advantages, Yu warns that rising U.S. yields and a less predictable Federal Reserve are limiting the momentum of carry trades in LatAm FX, resulting in persistently high hedge ratios [1]. He points out that the Fed, under Kevin Warsh, may intentionally avoid providing forward guidance, which could necessitate structurally higher hedge ratios for investors [1].
On the monetary policy front, BanRep (Banco de la República) is expected to hike rates by 50 basis points to 12.50%, reinforcing its reputation as the world’s most hawkish central bank [1]. Real rates in Colombia currently exceed 6%, while economic activity and demand remain robust, with retail sales expanding at double-digit annualized rates and consumer confidence rebounding strongly in June [1].
However, Yu also notes that the past week saw significant surprises in emerging market policy decisions, as both Bank Indonesia and the South African Reserve Bank chose to hold rates steady despite upside inflation risks, diverging from their previously hawkish stances [1].
CONCLUSION
Latin American assets continue to offer attractive carry opportunities, supported by strong real rates and favorable terms of trade. However, uncertainty around the Federal Reserve's policy direction and recent surprises from other emerging market central banks are tempering carry trade momentum and keeping hedge ratios elevated.