BNY’s Geoff Yu notes that Latin American (LatAm) currencies have been the standout Emerging Markets (EM) FX performers, with holdings remaining strong throughout the conflict and supported by attractive nominal and real rates. However, he warns that if risk appetite broadens after the ceasefire, flows could rotate into cheaper APAC (Asia-Pacific) and EMEA (Europe, the Middle East, and Africa) assets, limiting further upside for LatAm FX despite solid fundamentals.

Strong carry but vulnerable positioning

"In FX markets, the recovery in risk sentiment is still tentative, but EM FX holdings are starting to pick up gradually. Performance distribution remains uneven, however."

"Over the past quarter, the dollar has remained under cross-border pressure driven by hedging demand that dominated in January and February and has re-emerged since the ceasefire. LatAm, at the other end of the spectrum, delivered a tremendous quarter and was by far the best-bought region."

"It remains the best-held. Throughout the conflict, not a single currency came close to moving into underheld territory."

"If the ceasefire holds and risk appetite picks up, the scope for holdings recovery across risk assets means it will be difficult for Latin American currencies to build on current positioning. Initially, this need not mean carry deteriorates, which would entail significant Latin American currency sales."

"APAC and EMEA could become more attractive [as] valuations improve. Risk rotation could accelerate materially, driven by the progressive cheapening of USD funding costs."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)