JPMorgan: Carry Trades to Continue Supporting High-Yield Latin American Currencies

The appeal of carry trades will continue to provide a powerful tailwind for high-yielding Latin American currencies, even as their recent rallies may not be fully justified by underlying economic fundamentals, according to J.P. Morgan Private Bank.

The Allure of High Yields

Currencies such as the Colombian peso, Brazilian real, and Mexican peso rank among the highest-yielding in the world. The profitability of carry trades—borrowing in a low-interest-rate currency like the U.S. dollar to invest in a higher-yielding one—has been amplified by a recent dip in the dollar, according to Nur Cristiani, Head of Latin America Investment Strategy at J.P. Morgan Private Bank.

Speaking at the Reuters Global Markets Forum, Cristiani highlighted the remarkable returns. A year-to-date carry trade strategy using the Colombian peso, which involves borrowing U.S. dollars and investing at Colombia's overnight rate, has generated a return of approximately 27%, according to the bank's calculations. This performance is more than double the returns of the S&P 500 over the same period.

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Regional Opportunities and Risks

Beyond attractive yields, Latin America benefits from its geographic proximity to the United States and its rich natural resources, positioning it to capitalize on the strategic competition between Washington and Beijing. Cristiani identified Chile as offering the best combination of earnings growth, valuation, and macroeconomic stability in the region.

• Chile: The country's economy is relatively stable, its rate-cutting cycle is nearing an end, and its terms of trade are improving alongside rising copper prices. Cristiani noted that Chile's central bank may adopt a more hawkish tone in the second half of the year, but this is not expected to alter the fundamental investment case.
• Brazil: The nation's fiscal situation remains a core risk for investors, with high debt-servicing costs pressuring public finances amid an overnight interest rate near 14%. Despite the uncertainty, Cristiani described Brazil as her most "contrarian" investment idea in Latin America, citing its now-attractive valuations.