Latin American FX Slumps as Yen’s Surge Threatens Carry Trades

Kevin Simauchi

17 July 2024 at 4:54 pm·3-min read

(Bloomberg) -- Latin American currencies retreated amid a sharp rally in the yen, pushing traders to unwind carry trades that are funded by the Japanese currency.

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Mexico, Colombia, Brazil and Chile were some of the biggest laggards against the dollar on Wednesday, with Chile’s peso falling nearly 1.7%. South Africa’s rand also edged lower. A broader gauge of EM currencies traded flat, while stocks inched lower for a fourth straight session.

The Japanese yen was up roughly 1.3% versus the dollar as of 4:31 p.m. in New York. The yen serves as a funding currency for carry trades, in which investors borrow in lower-yielding currencies to invest in those that offer higher yields. The unwinding of those trades puts added pressure on emerging markets and Latin America especially, which has been a favored destination for carry traders for the past two years.

“As the yen strengthens, carry trades funded through JPY seem to be getting unwound especially on the more high beta currencies” like Brazil’s real and Colombia’s peso, said Brendan McKenna, emerging-market strategist at Wells Fargo in New York.

President Donald Trump and running mate JD Vance have pushed a “platform of protectionist trade policy and more inward looking measures that has resulted in volatility,” McKenna said. “That volatility is pushing the traditional safe haven currencies stronger today,” he said, referring to the Swiss Franc and Japanese Yen.

Meanwhile, Hungary’s forint, Thailand’s baht and the Czech koruna led EM currency gains for the day. Hungary’s forint is holding onto recent gains after central bank guidance Monday that increased the probability of a rate cut as soon as next week. The forint’s strength may help sway authorities toward a rate cut versus a pause.

Equity Markets

The MSCI gauge for EM equities fell for a fourth session, sliding some 0.5%. The index was led lower by shares of Taiwan Semiconductor Manufacturing Co., SK Hynix Inc. and Tencent Holdings Ltd.

TSMC shares took a leg down on Wednesday after Trump questioned whether the US has a duty to defend Taiwan. Trump’s push for tariff-based policies has also become a potential drag for shares of EM companies.

“There are two reasons for weakness in EM stocks; the ‘Trump trade’ and weakness in Chinese data,” said Marija Veitmane, senior multi-asset strategist at State Street Bank & Trust Co. “The probability of President Trump 2.0 has significantly increased, first since the presidential debate and then the assassination attempt. His proposed policies are extremely unfriendly for emerging markets — especially trade tariffs.”

Adding to woes, the Biden administration has told allies that it’s considering using the most severe trade restrictions available if companies such as Tokyo Electron Ltd and ASML Holding NV continue giving China access to advanced semiconductor technology. The US is also weighing additional sanctions on specific Chinese chip companies linked to Huawei Technologies Co.

Concern about the restrictions ignited a selloff in tech stocks across the globe, with the Nasdaq 100 recording its worst day since 2022.

--With assistance from Colleen Goko.