BNY data show a split in FX flows, with Latin America recording its strongest inflows in six months while EMEA has its strongest selling in six months. The iFlow Carry index indicates that high-yield currency holdings are starting to fall, but the drivers vary by region.
Low-yield APAC currencies and the euro are linked to the broader reversal, while selling linked to carry reduction is concentrated in CEE and Africa. Despite this, CEE and African currencies still have relatively strong holdings.
Latin American currencies are described as better held than other emerging market currencies, and Colombia is cited as having resumed its tightening cycle. COP is the strongest-performing currency in iFlow over the past month.
The report notes that as valuations and holdings reach extremes, profit-taking becomes more likely. It also states that fiscal dominance risk in CEE is very high and that political developments are receiving more attention.
The report says CEE carry positions may be trimmed while volatility conditions remain supportive. It adds that CEE flows are viewed as easier to reduce than other regions.
We are seeing a significant split in fund flows between emerging markets, with money pulling out of EMEA at the fastest pace in six months. This pressure is almost entirely focused on currencies in Central and Eastern Europe and Africa, despite these positions still being widely held. In contrast, Latin American currencies are attracting their strongest inflows in half a year.
The risk of fiscal dominance is becoming a major concern in CEE, and markets are taking notice of the political landscape. For instance, recent January 2026 inflation data in Poland remains stubbornly above target at 4.8%, yet the central bank appears hesitant to tighten policy. This makes long positions in currencies like the Polish Zloty and Hungarian Forint look exposed.
This contrasts sharply with Latin America, where central banks are demonstrating more independence. We saw Colombia resume its tightening cycle back in 2025, a move that strengthened the COP. More recently, Mexico’s ongoing nearshoring boom helped boost foreign direct investment by 15% in the final quarter of 2025, supporting the MXN.
With FX volatility remaining low, as the VIX hovers around 14, now is the time to reduce exposure to CEE carry trades. Derivative traders should consider buying put options on the HUF or PLN against the EUR to hedge or speculate on a downturn. An alternative is structuring trades that favor strong LatAm currencies, such as going long the MXN against the PLN.
We recall a similar, though briefer, sell-off in late 2025 when regional jitters surfaced, showing how quickly sentiment can turn. Given the heavy ownership in CEE FX, trimming these positions represents the path of least resistance. The bar for further profit-taking is low as these holdings and valuations are at extremes.
