BNY’s iFlow Carry indicator shows positions in high-yielding Latin American currencies are declining as markets reprice to a new Federal Reserve backdrop, with the adjustment framed as a steady reduction rather than outright liquidation. Transmission of Fed rates into the region is described as swift, while political developments are also affecting flows in both directions. With elevated short-term dollar preference in focus, rate decisions in Peru, Chile and Brazil over the next trading week are expected to avoid major surprises, yet the region remains exposed to changing global funding conditions.
Support comes from an improved terms-of-trade shock, with Brazil and Chile cited as beneficiaries as export values have risen to multi-year highs due to the conflict and other structural factors. These natural export-linked flows are positioned as a counterweight to rising global dollar preference, though real rates may need to adjust as Fed dynamics shift. Demand for dollar liquidity is also linked to funding share sales and U.S.-market offerings, while cross-border dollar hedges have fully unwound prior excess short positions built before the conflict; yields and policy guidance are portrayed as sufficient mainly to limit large-scale liquidation.
Export Flows Cushion Declining Holdings In High-Yield Currencies
We see holdings in high-yielding currencies like the Brazilian real and Chilean peso declining as the Federal Reserve maintains its firm policy stance. However, we believe this is a steady reduction rather than a full-scale panic sell-off for now. The key is that strong commodity exports are providing a cushion against the rising preference for the US dollar.
Brazil’s trade surplus, for example, hit a record in May 2026 on the back of strong iron ore and agricultural sales, providing natural demand for the real. Similarly, copper prices holding above $10,500 per tonne have kept the Chilean peso from falling as much as other emerging market currencies. These strong export flows are helping to absorb some of the selling pressure from carry trades unwinding.
The current yields are likely just enough to prevent a massive liquidation of existing positions, not to attract new money. We are therefore looking at options to trade the expected volatility around upcoming central bank meetings, particularly in Brazil. A less-hawkish-than-expected statement could trigger a sharp move higher in USD/BRL.
Protecting Positions Amid Changing Fed Dynamics
For those still holding long positions in currencies like the Mexican peso or Brazilian real, now is the time to consider downside protection. Buying puts on these currencies could be a prudent hedge against a faster-than-expected reduction in carry holdings. We remember from the 2022-2023 tightening cycle how quickly sentiment can shift against emerging markets when the Fed stays aggressive.
Looking ahead, the real test will be if regional central banks signal a willingness to keep their real interest rates high enough to compete with the US. We’ll be watching for any language suggesting more aggressive rate hikes to attract fresh inflows, which would be our signal to reconsider short-term bearish positions. Without that, the path of least resistance for these currencies is likely a gradual depreciation against the dollar.
