BNY data show broad inflows into Latin American equities, bonds, and FX in recent months. Positioning is now higher than in other emerging markets. The note ties this to carry demand and warns the set-up could lead to a correction unless the region delivers major reforms or sees a lasting rise in commodity prices.
As of Monday, every Latin American equity market with enough data had net buying, with Brazil and Peru among the strongest. In fixed income, every market except Peru had net buying on a quarterly basis across sovereign and corporate bonds.
FX holdings in Latin America rose over the past two months, while other emerging markets struggled. This happened even as many widely traded APAC funding currencies strengthened. The move is described as mostly carry-driven, with early signs the broader move may be topping out.
Latin American equity holdings are moving in line with emerging market peers. In fixed income, the gap has widened, led by sovereign bonds. In November, Latin American sovereign holdings rose to about 15% above the rolling 12-month average, while emerging markets fell below benchmark. By early February, overall EM holdings were still below benchmark, while Latin American fixed income was about 10% higher. The adjustment started first in FX.
Looking back to a year ago, we noted that by early 2025 Latin American assets had seen huge, broad inflows. Positioning across equities, bonds, and currencies became extremely stretched. This looked unsustainable without major reforms. The risk of a meaningful correction was high because the region was unlikely to decouple from developed market performance.
That adjustment did happen, starting in FX in mid-2025, as expected. As central banks in Brazil and Mexico began to signal rate cuts while the U.S. Federal Reserve kept rates steady, the carry trade reversed. Currencies like the Brazilian real fell more than 8% against the dollar in the second half of the year. This supported the view that the first breaks would show up in FX.
The correction then moved into equities. The MSCI EM Latin America Index fell nearly 15% from its first-quarter 2025 peak by the third quarter. The drop was driven by the unwind of crowded long positions built earlier in the year. Outflows picked up as investors reacted to global growth worries, especially concerns tied to Asia.
Latin America’s reliance on commodity prices and global demand showed up again in 2025. For example, weaker industrial activity in China pushed iron ore prices down, falling below $100 per ton in late 2025. That directly hurt expectations for Brazilian sovereign revenues. It reinforced the point that the region cannot grow independently of APAC trading partners and developed markets.
Now that much of the excess has cleared and valuations look more reasonable, the trading dynamic has changed. Instead of positioning for a broad decline, derivatives traders may want more targeted option strategies that seek upside while limiting downside. One example is buying call options on country ETFs like Brazil’s EWZ to gain leveraged exposure to a potential rebound over the coming weeks with defined risk.
With uncertainty still lingering after last year’s correction, implied volatility remains high versus historical averages. That can favor strategies that benefit from big moves in either direction, such as long straddles on the most liquid regional equity indices. This approach can profit if markets rally sharply on improved sentiment or sell off again on renewed global growth fears.
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