BNY data show a split in FX flows. Latin America has its strongest inflows in six months, while EMEA has its strongest selling in six months. The iFlow Carry index suggests that holdings in high-yield currencies are starting to decline, but the reasons differ by region.
Low-yield APAC currencies and the euro appear tied to the broader reversal. Selling that is clearly linked to carry reduction is mainly concentrated in CEE and Africa. Even so, CEE and African currencies are still held at relatively high levels.
Latin American currencies are described as better held than other emerging market currencies. Colombia is cited as having restarted its tightening cycle. COP is the strongest-performing currency in iFlow over the past month.
The report notes that when valuations and holdings reach extreme levels, profit-taking becomes more likely. It also says fiscal dominance risk in CEE is very high, and that political developments are getting more attention.
The report adds that CEE carry positions may be trimmed while volatility remains supportive. It also argues that CEE flows are easier to reduce than flows in other regions.
We are seeing a clear split in emerging-market fund flows. Money is leaving EMEA at the fastest pace in six months. Most of that pressure is focused on currencies in Central and Eastern Europe and Africa, even though these positions are still widely held. In contrast, Latin American currencies are seeing their strongest inflows in half a year.
Fiscal dominance risk is becoming a key concern in CEE, and markets are paying closer attention to politics. For example, Poland’s January 2026 inflation print remains above target at 4.8%, but the central bank still looks reluctant to tighten. That leaves long positions in currencies such as the Polish zloty and Hungarian forint looking vulnerable.
This is very different from Latin America, where central banks appear more independent. Colombia resumed its tightening cycle in 2025, which supported the COP. More recently, Mexico’s nearshoring boom helped lift foreign direct investment by 15% in Q4 2025, supporting the MXN.
With FX volatility still low, and the VIX near 14, this is a good time to reduce exposure to CEE carry trades. Derivatives traders could consider buying EUR puts on HUF or PLN to hedge or position for a decline. Another option is to structure trades that favor stronger LatAm currencies, such as going long MXN versus PLN.
We saw a similar, though shorter, sell-off in late 2025 when regional concerns emerged, which shows how fast sentiment can change. Given the heavy ownership in CEE FX, trimming these positions may be the easiest move. With holdings and valuations at extremes, the threshold for further profit-taking is low.
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