BNY data show broad inflows into Latin American equities, bonds and FX over recent months, leaving positioning higher than other emerging markets. The note links this to carry demand and says the set-up raises the risk of a correction without major reforms or sustained commodity price increases.
As of Monday, every Latin American equity market with enough data was net bought, with Brazil and Peru among the strongest. In fixed income, every market except Peru was net bought on a quarterly basis across sovereign and corporate bonds.
FX holdings in Latin America rose over the past two months while other emerging markets struggled, even as many widely traded APAC funding currencies gained. The move is described as mostly carry-related, with early signs that the broader move may be peaking.
Latin American equity holdings are tracking emerging market peers, while the fixed income gap has widened, led by sovereign bonds. In November, Latin American sovereign holdings rose to about 15% above the rolling 12-month average while emerging markets fell below benchmark; by early February, global EM holdings stayed below benchmark and Latin American fixed income was about 10% higher, with adjustment starting first in FX.
Looking back a year ago, we saw that by early 2025, Latin American assets had experienced huge, indiscriminate inflows that left positioning extremely stretched. This surge in capital across equities, bonds, and currencies was viewed as unsustainable without major reforms. The risk of a material correction was high, as the region could not realistically decouple from the performance of developed markets.
That predicted adjustment did indeed materialize, beginning, as expected, in the foreign exchange markets in mid-2025. As central banks in Brazil and Mexico began signaling an easing cycle while the U.S. Federal Reserve held rates firm, the carry trade unwound, causing currencies like the Brazilian Real to weaken over 8% against the dollar in the second half of the year. This confirmed the view that the initial cracks would appear in FX first.
The correction soon spread to equities, with the MSCI EM Latin America Index falling nearly 15% from its peak in the first quarter of 2025 by the time we reached the third quarter. We saw this pullback driven by the unwinding of the crowded long positions that had been built up indiscriminately earlier in the year. The heavy outflows reflected a return to reality as global growth concerns, particularly out of Asia, began to weigh on sentiment.
The region’s dependence on commodity prices and global demand became clear once again during 2025. For instance, weaker-than-expected industrial activity in China led to a softening in iron ore prices, which fell below $100 per ton in late 2025, directly impacting sovereign revenue expectations for Brazil. This reinforced the point that Latin America cannot grow in isolation from its key trading partners in APAC and developed markets.
Now, with much of that excess froth removed and valuations appearing more reasonable, the trading dynamic has shifted. Rather than positioning for a broad downturn, derivative traders should consider more targeted strategies using options to capitalize on a potential recovery while managing risk. For example, buying call options on specific country ETFs like Brazil’s EWZ offers leveraged exposure to a potential rebound in the coming weeks with a defined downside.
Given the uncertainty that followed last year’s correction, implied volatility remains elevated compared to historical averages. This environment is favorable for strategies that profit from price movement, regardless of direction, such as long straddles on the most liquid regional equity indices. Such a position would be profitable if markets either rally strongly on renewed optimism or sell off on renewed global growth fears.
