Latin American FX and rates are being supported by improved terms of trade for energy and soft commodity exporters, alongside strong real-rate anchors that can feed through into currencies or duration. The lift to energy exporters seen in Q2 during the initial phase of the conflict is expected to recur, while some governments may prefer duration as they seek greater fiscal space. Carry appeal, however, is being tempered by rising US yields and reduced visibility around Federal Reserve policy, which is keeping hedge ratios elevated.
Policy divergence within EM is also in focus. BanRep is expected to raise rates by 50bp to 12.50%, with real rates above 6%, even as activity indicators remain firm: retail sales are still expanding at double-digits on an annualised basis and consumer confidence rebounded in June. By contrast, the past week saw policy surprises elsewhere, as Bank Indonesia and the South African Reserve Bank held rates rather than hiking despite upside inflation risk.
Supportive Backdrop for Latin American Exporters and Rates
We see a renewed opportunity for Latin American assets as global energy and agricultural commodity prices rise, boosting exporters in the region. Strong real interest rates in these countries continue to anchor local currencies and support bond yields. However, we must prepare for volatility as rising U.S. Treasury yields, with the 10-year yield hovering around 4.2%, threaten to pull capital back to defensive safe havens.
With the Federal Reserve adopting a less predictable policy stance and potentially moving away from clear forward guidance, carry-trade momentum is hitting a wall. To manage this uncertainty, we advise derivative traders to maintain structurally high hedge ratios on foreign exchange positions in the coming weeks. We believe fixed-income instruments currently offer a much stronger risk-reward profile than unhedged currency exposure.
Policy Divergence and Select Opportunities Within Emerging Markets
Colombia’s central bank stands out as exceptionally hawkish, with expectations of a 50-basis-point rate hike to 12.50% to combat persistent demand. While Colombia’s real rates sit above a strong 6%, other emerging markets like Indonesia and South Africa have recently paused their rate hikes despite inflation risks. This divergence means we must selectively target currencies with robust consumer backdrops, such as Colombia where retail sales have shown double-digit annualized growth.
