Latin American currencies were the strongest-performing Emerging Markets FX over the past quarter, and holdings stayed firm during the conflict. They were supported by attractive nominal and real interest rates.
Risk sentiment has improved but remains tentative, while EM FX holdings have begun to rise gradually. Performance has been uneven across regions.
Dollar Hedging Pressure Returns
The US dollar faced cross-border pressure linked to hedging demand in January and February, which returned after the ceasefire. Latin America was the most bought region over the quarter.
Latin American currencies remained the best held, and none moved into underheld territory during the conflict. If the ceasefire continues and risk appetite strengthens, other risk assets may see holdings recover, which could limit further gains for LatAm FX.
Any early shift would not necessarily weaken carry, which would require large Latin American currency selling. Asia-Pacific and EMEA assets could look more attractive as valuations improve, and rotation may increase as USD funding costs become progressively cheaper.
We see that Latin American currencies have been the top performers, largely because of their high interest rates which have attracted significant investment. Looking back at 2025, the stability of currencies like the Mexican Peso during the conflict made them a haven, but this trade is now very crowded. Data from the Institute of International Finance confirms this, showing portfolio flows into the region hit a three-year high in March 2026.
Options And Rotation Opportunities
With the ceasefire holding and global risk appetite slowly recovering, we should be cautious about further gains in LatAm FX. Money is likely to start looking for better value elsewhere, rotating into assets in Asia and Europe that were overlooked during the conflict. For instance, the Polish Zloty and Hungarian Forint have lagged significantly but are now showing signs of stabilization as European energy security concerns from 2025 have eased.
This suggests it’s a good time to consider protective strategies on our long LatAm positions using options. We could look at buying puts on the Brazilian Real (BRL) or selling out-of-the-money calls on the Mexican Peso (MXN), which would protect against a downturn or profit if the currencies move sideways from here. Implied volatility for these pairs has fallen since the ceasefire but remains elevated compared to historical levels from before 2025, offering reasonable premium for sellers.
Simultaneously, we are seeing opportunity in undervalued currencies in the Asia-Pacific region, which are poised to benefit from this rotation. The South Korean Won is a prime candidate, still trading nearly 8% below its pre-conflict average from early 2025 despite Q1 2026 export data showing a strong recovery. Buying call options on the Won could offer a low-cost way to position for a significant catch-up rally in the coming months.
This entire rotation could accelerate because it’s getting cheaper to borrow U.S. dollars. Following the Federal Reserve’s dovish statements last month, key funding indicators show that borrowing costs have fallen to their lowest levels since the end of 2025. This makes it easier for investors to fund trades into higher-yielding or undervalued EMEA and APAC currencies, putting pressure on crowded positions in Latin America.
