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LATAM FX: Goldman Sachs Says Case for Carry Accrual Remains Compelling

LATAM FX
  • As political noise out of EM gradually decreases and before the US election is more squarely in focus, Goldman Sachs think there could be a window of stability that is conducive to EM carry longs, especially as the US data mix continues to point to a benign softening of economic activity. GS recommend going long MXN and COP versus EUR with a total return target of 106 and a stop of 97. The 12-month carry of this trade is just over 7%. 
  • Both MXN and COP have already appreciated over the last few days, making for a less attractive entry point. However, GS think that the case for carry accrual with some potential spot upside in these currencies remains compelling. 
  • They continue to believe the more recent stabilisation in MXN, together with still strong economic fundamentals (high FX carry included) make it an attractive trade from a total return perspective, especially as the local news flow has turned marginally more supportive. Similarly, GS think that the COP sell-off is not fully justified by fundamentals, especially when looking at its divergence relative to oil prices. Moreover, BanRep remains cautious in its easing cycle. 
  • The main risk to this trade is a sharper slowdown in US activity that dampens risk sentiment, though EUR funding should help neutralise part of that risk. 

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