JPMorgan sees Latin American currencies supported by carry trades

High-yielding Latin American currencies will continue to receive support from carry trades despite recent gains not reflecting improved economic fundamentals.

The Colombian peso, Brazilian real and Mexican peso rank among the world’s largest high-yielding currencies. A move to support the U.S. Treasury bond market last month pushed the dollar lower, making carry trades highly profitable.

Nur Cristiani, head of Latin America investment strategy at JPMorgan Private Bank, told the Reuters Global Markets Forum on Wednesday that a year-to-date carry strategy in the Colombian peso, borrowing dollars and investing at Colombia’s overnight rate, would have generated about 27% based on the bank’s calculations. This return is more than double that of the S&P 500 over the same period.

Beyond carry trades, Latin America’s proximity to the United States and natural resource abundance allow the region to benefit from rivalry between Washington and Beijing.

Cristiani identified Chile as offering the best combination of earnings growth, valuations and macro stability. She cited a relatively stable economy, the completion of its easing cycle and strong terms of trade as copper prices have risen.

The central bank may start to show a more hawkish bias, but that would likely occur toward the second half of the year and would not derail the story, Cristiani said.

Brazil’s fiscal position remains a key concern, particularly with the overnight rate close to 14%, making debt servicing costly for public finances. Despite the uncertainty, Brazil was her most "out of consensus" Latin American pick, citing current valuations.