JPMorgan: Carry Trades to Buoy High-Yield Latin American Currencies

High-yielding Latin American currencies are expected to remain supported by investor appetite for carry trades, even as recent gains have outpaced improvements in economic fundamentals, according to JPMorgan Private Bank.

Nur Cristiani, head of Latin America investment strategy at the bank, told the Reuters Global Markets Forum that currencies like the Colombian peso, Brazilian real, and Mexican peso are benefiting from this strategy. A weaker U.S. dollar, following a move to support the Treasury bond market last month, has made these trades particularly profitable.

The Allure of the Carry Trade

The returns from these strategies have been substantial. Cristiani noted that a year-to-date carry trade involving the Colombian peso—borrowing in U.S. dollars and investing at Colombia's overnight rate—would have yielded approximately 27%, based on JPMorgan's calculations. This performance is more than double the return of the S&P 500 over the same period.

This dynamic underscores how investors are prioritizing high yields in the current environment. The profitability of borrowing in a low-interest-rate currency to invest in a high-interest-rate one is a primary driver of capital flows into the region's foreign exchange markets.

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Regional Outlook and Country specifics

Beyond currency trades, Cristiani highlighted broader tailwinds for Latin America, including its proximity to the United States and its wealth of natural resources. These factors position the region to benefit from the ongoing geopolitical rivalry between Washington and Beijing.

JPMorgan identified specific opportunities and risks within the region:

• Chile: Offers the best mix of earnings growth, valuations, and macroeconomic stability. Cristiani cited its stable economy, the completion of its monetary easing cycle, and strong terms of trade from rising copper prices as key positives.
• Brazil: The nation's fiscal position remains a "key concern," with a high overnight rate near 14% making public debt servicing expensive. Despite this, Cristiani called Brazil her most "out of consensus" pick in the region, pointing to attractive valuations.