Every now and then, you run into someone who seems spoiled by
success... only to find out that he or she was a complete pill
before they became rich and famous. So it is with Latin American
markets; last Wednesday's post-FOMC catapult higher did not
establish a dependency on the dollar carry trade; it simply
highlighted what was already the case.
Let's take a look at the Bloomberg-JPMorgan index of Latin American
currencies, a counterpart to the Asian currency index I discussed
. This index is 33% each the Brazilian real and Mexican peso; 12%,
10%, and 7% the Chilean, Argentine, and Colombian pesos,
respectively; and 5% the Peruvian sol (not to be confused with the
1964 bubblegum classic
"Little Bit O' Soul
The excess carry returns of various major currencies into this
index from the US adoption of zero interest rate policies in
December 2008 are depicted below; the actual index begins in June
2005. The abrupt decline and rebound of the key carry trade
currencies, such as the US dollar and Japanese yen, over the past
five months is easy to spot.
Is the performance of an index of Latin American stocks weighted
per the currency index linked to the dollar carry trade? If we map
this index's returns in US dollar terms against the excess carry
return of the dollar into Latin American currencies, we get a very
powerful relationship. The r(2), or percentage of variance
explained, is a robust 0.86.
I highlighted the May 8, 2013, datum, marking the start of the
currency index's downturn in blue, and noted last Wednesday's
environment with a green bombsight. If money starts to flow back
into Latin American currencies, it also will start flowing back
into Latin American stocks. As I expect other major central banks
to follow the Federal Reserve's lead in the game of competitive
devaluation, I expect the next few months to be clear sailing for
Latin American stocks.
ETFs such as
(NYSEARCA:EWW), and the
S&P Latin American 40 Index
(NYSEARCA:ILF) all are excellent ways to play this trend. Keep one
thing in mind about free money, though: Those who give it to you
without warning can take it away without warning. This is a trade,
not an heirloom investment.