Safest Carry in Emerging Markets Is in Latin American Currencies

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Or sign-in if you have an account.t(dyhz25yowj3p1ystftdemn_media_dl_1.png Bloomberg(Bloomberg) — Emerging-market currency volatility has dropped to the lowest since the start of year and that’s re-energizing carry trades, particularly those involving Latin America that are seen to offer the juiciest returns.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe region offers higher interest rates than most of its developing-nation peers, meaning investors can gain extra profit from the trades that involve borrowing where rates are low and buying where they provide a premium. Latin American currencies are also the most attractive in emerging markets based on one metric used by many traders: the carry-to-risk ratio.Latin America offers an extra bonus as the Iran war escalates once again: many countries in the region are oil exporters meaning they are relatively insulated from the impact of higher oil prices.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try again“Latin American currencies are once again proving to be some of the top performers in the FX space,” said Chris Turner, global head for markets and regional head of research for the UK and central and eastern Europe at ING Bank NV in London. “Low foreign-exchange volatility is sending carry trade money into a region a little less exposed to the energy shock than EMEA and Asia,” he said, referring to the region comprising Europe, the Middle East and Africa.Latin American currencies have offered the best returns in emerging-market carry trades this year. A strategy of borrowing in the dollar and buying the Colombian peso has returned 22%, one targeting the Brazilian real has gained 12.9%, and another investing in the Argentine peso has climbed 12.8%. In contrast, trades buying the Polish zloty, Indonesian rupiah and Thai baht have all lost at least 5%.Global currency volatility surged when the Iran war began in late February but has been in a downtrend since then. A gauge of one-month implied volatility for emerging-market currencies fell to the lowest level since January on Thursday, according to an index from JPMorgan Chase & Co. The gauge has declined as central banks have sought to suppress excessive currency moves and trade tensions have eased. Lower volatility is vital for carry as it protects any interest-rate advantage from being wiped out by adverse currency moves.The Brazilian real leads all its emerging-market peers in the carry-to-risk metric with a current score of 1.33, based on a list of 27 currencies compiled by Bloomberg. The Colombian peso is third with 1.31 and the Mexican peso is fifth with 0.91. The ratio is calculated based on the difference between three-month interest rates in the target and funding currencies, divided by their implied volatility.Local market catalysts are also at play, especially for currencies from Colombia and Brazil, encouraging moves independent of the external conflict, according to Brendan McKenna, a strategist for Latin American currencies and rates at Societe Generale.“Colombia’s idiosyncratic story is positive on the back of the market friendly election outcome and a central bank still looking to lift policy rates,” McKenna said. “And in Brazil, the nuances are going the opposite way, in our view. Domestic politics are perhaps turning more consistent with a less market friendly outcome while the BCB may look to cut rates as early as August.”Wall Street banks have been favoring higher-yielding currencies across emerging markets. Citigroup Inc. strategists recently told clients to go long a basket of the Brazilian real, Colombian peso, Mexican peso and Turkish lira, using the euro and the US dollar as funding currencies. JPMorgan Chase & Co. is now overweight the Colombian peso, which benefits from some of Latin America’s highest real interest rates.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.The largest proportion of current carry positioning by investors is concentrated in Latin America, specifically Brazil and Colombia, according to estimates from Citigroup Inc.“If the Federal Reserve remains on hold, emerging-market assets can continue to perform, particularly in high-carry currencies backed by strong domestic macroeconomics and stable political backdrops, such as Colombia,” said Vandana Bhatter, head of corporate foreign-exchange sales for Asia Pacific at the US bank in Singapore.Still, the history of Latin America shows how easily optimism can be derailed. “Latam is not without risk,” said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen in London. “We have the elections in Brazil and then in Colombia there is already a lot of optimism about the fiscal consolidation path, for which personally I think one needs to be skeptical of.”“In addition, we have the El Niño risk, which threatens the Andean currencies” such as the Chilean peso, Peruvian sol and Colombian peso, he said.Latin American currencies also looked primed to outperform due to a positive outlook for their exports along with their elevated interest rates, according to Brandywine Global Investment Management.“There is an improvement in current account surpluses due to the growth in commodities — oil and mining — exports and most recently growing manufacturing exports due to near-shoring,” said Carol Lye, a portfolio manager at Brandywine in Singapore.“In addition, Latam central banks had tightened monetary policies previously, bringing nominal rates to a high level and now that inflation has been weakening, high real yields help to maintain the attractiveness of Latam currencies,” she said.Central banks in Indonesia, Paraguay, Russia, Nigeria and South Africa will announce policy decisionsSouth Korea will report second-quarter advance GDP dataMexico, Lebanon release CPI numbersMalaysia, Taiwan, Argentina and Brazil publish trade data—With assistance from Vinícius Andrade and Carolina Wilson.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. 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