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Latin America Currencies Jump as Traders Bet on Carry Comeback

(Bloomberg)

(Bloomberg) -- Latin American currencies eclipsed peers on Tuesday as comments from Federal Reserve Chair Jerome Powell cemented investor appetite for riskier assets.

The Chilean peso and Brazilian real led the advance as Powell said “more good data” would increase confidence that inflation is moving down. That strengthened the case for interest-rate cuts in the world’s largest economy, boosting high-yielding currencies from Colombia and Mexico. Still the broad emerging-market currency index was barely changed, swinging between small gains and losses. 

The so-called carry appeal for Latin American currencies should return as the volatility that shook global markets last month abates. What’s more, sticky inflation in Mexico and Colombia are bolstering the case for central banks to keep monetary policy tighter for longer. 

“Carry is taking relevance again,” said Andres Pardo, a strategist at XP Investimentos. “Latin America had one of the worst performances in the selloff last month, so in the rebound there’s bigger room to gain.”

Colombia’s peso traded at the highest in nearly a month on Tuesday, while Brazil’s real and Mexico’s peso jumped to a two-week high. The Chilean peso meantime, extended this month’s gains as traders price in the end of the easing cycle.  

A string of political developments had clouded the outlook for the region’s assets starting with the unexpected election results in Mexico and followed by speculation about the next central bank leader in Brazil. 

Nothing in Powell’s remarks seem to have shifted the market expectations of two quarter-point cuts this year. The greenback rose. 

That persistent dollar strength is why it’s best to bet against the euro or yen when buying Latin American currencies, according to Jens Nystedt, a senior portfolio manager at EMSO Asset Management in New York. 

“We see limited focus and positioning in Latam FX that makes it attractive,” he said. “Carry is making a comeback for the rest of summer given the more supportive backdrop.” 

In Europe, the Hungarian forint extended the week’s loss as the country’s inflation rate retreated from the top of the central bank’s tolerance range in June, making it more likely that the central bank in Budapest will consider an interest-rate cut at its upcoming meetings. 

In other markets, the gauge for Latin American’s stocks jumped 0.9%, more than doubling the gain on the broad emerging-market equity index, which is heavily weighted to Asia. The S&P 500 closed at the highest on record, with the two largest exchange-traded funds listed in the US that track developing stocks advancing as well.  

Argentina’s bonds gained across the curve, with dollar notes maturing in 2025 up 0.4 cent on the dollar as of midday in New York. Investors are widely expecting Javier Milei’s administration to make good on about $2.7 billion in payments to creditors this week. 

Elsewhere, Kenya bonds due in 2031 weakened after Moody’s Ratings cut the nation’s credit score deeper into junk, citing difficulties in implementing revenue-based fiscal consolidation. Sri Lanka’s dollar bonds led losses among emerging-market peers. Citigroup recommended last week to sell the notes before the election if they reach their fair value of 60 cents on the dollar. 

©2024 Bloomberg L.P.

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