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Goldman Sachs: Balancing Cheapness, Fundamentals And Carry

LATAM FX
  • While MXN was outperforming its peers earlier in the year, a more uncertain US growth outlook and demanding valuations have meant that BRL and COP have picked up the baton more recently.
  • Between the three, BRL continues to be Goldman Sachs’ favoured LatAm carry trade: they think there is still some degree of cheapness (especially compared to MXN) and it is where GS think a virtuous cycle between FX and rates can more clearly materialise. In particular, the fact that the current fiscal proposal implies restraint against consistent fiscal slippage has relaxed what was an important constraint for Brazil local assets.
  • Furthermore, March inflation data points to a continuation of the disinflation process and on the global side, BRL features a positive beta to both the China reopening and the recent increase in oil prices.
  • GS think it is also worth acknowledging the backdrop for COP performance is less negative than a couple of months ago: domestic political noise has declined and the Peso’s betas have allowed it to benefit from lower US yields and higher oil prices. Still, after a strong rally, a clearer improvement in fundamentals is probably required to unlock more of COP’s still elevated risk premium in a sustained way.
  • All in all, under their forecast that the Fed is now in its “home stretch” and US growth is low but non-recessionary, GS think it makes sense to lean into total returns from EM currencies and the EM FX carry theme can re-gain popularity in this type of macro environment.
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