LatAm FX: Rotation favors equities and carry – BNY

BNY’s Geoff Yu notes that crowded exposure to Latin American (LatAm) bonds is unwinding as higher U.S. yields drive a domestic repricing of real-rate risks. The bank sees flows rotating toward regional equities and maintains a constructive tactical view on Latin American carry. Peru, Mexico and United States-Mexico-Canada Agreement (USMCA)-related developments are highlighted as key policy and political drivers for regional assets.

Bond outflows, equity and carry appeal

"Our longstanding concern about over-crowded exposure to Latin American bonds is beginning to materialize. End-June flows marked the first time in two months that the monthly smoothed flow score turned negative."

"Combined with stretched FX positioning, higher U.S. yields leave Latin America's yield-sensitive bond markets vulnerable to further adjustment."

"That does not imply broad capital outflows from the region. Instead, our data point to rotation rather than retrenchment, with equity flows approaching net purchase territory after a particularly weak May."

"Given the structurally lower FX hedge ratios associated with equity inflows, this rotation does not undermine our constructive tactical view on Latin American carry, where regional currencies remain our preferred expression."

"Forward look: Peru’s central bank is expected to leave rates unchanged this week, although inflation remains above target and a hawkish bias is likely until the Fed signals a clearer shift in direction."