Carry-trades into Latin America

With the spectre of the 1980s hunting emerging markets, stronger interconnectedness may mean higher volatility across global financial architectures. Some interesting data capturing cross-border exposures for Chile, Colombia, Mexico, Brazil and Peru (LA5).

 

Debt held by non-residents fell by an average of 30% across LA5 after Lehman, to then double (Colombia) or triple (rest LA5) in volume (here are the carry-trades Paul Tucker talked about ). In an effort to stem currency appreciation, central banks intervened in currency markets, leading to large sterilizations of an average of 20% of GDP across the group between 2010 and 2012. Despite these interventions, exchange rates appreciated by around 30% for Chile and Colombia, 25% for Peru and 10% for Mexico.