During January, there was the largest capital flow to emerging markets for a similar month in 21 years, reported the Institute of International Finance (IIF, for its acronym in English).
According to information collected by experts from the institute, in the first month of the year and despite the global economic and political uncertainty, the entry of 98.8 billion dollars into this type of markets was recorded.
A monthly flow that exceeded by six the income observed in January 2025 and that exceeded the historical record set in January 2018, when emerging markets attracted 74.4 billion dollars, together.
Within the monthly report, Tracker of capital flows to emerging markets, they explained that this renewed attraction incorporates a significant acceleration from the 32.6 billion that entered in December.
They identified among the driving factors for this attractiveness, the issuance of sovereign debt from emerging markets, such as Mexico; the strong performance of local currency markets, which reinforced the strength of portfolio investments, and the favorable exchange rate dynamics that have maintained local debt, especially in markets with credible macroeconomic policy frameworks.
They stressed that the attractiveness of emerging markets was differentiated based on their own characteristics, such as those that contain financing risks.
They took the case of Indonesia, where indebtedness and weakness of the internal market have been a source of concern and capital outflow.
This behavior was surprising for IIF experts, given the general geopolitical context that, however, “did not prevent the broad reactivation of emerging market assets at an aggregate level.”
Rate differential
In the analysis, titled A coordinated start to the year, they maintained that the carry trade also played a fundamental role in debt inflows, especially where financing conditions and volatility remain favorable.
As analysts have explained, the carry trade is an investment strategy where short-term profits are obtained due to the interest rate differential. Investors borrow in a country where rates are very low, like Japan, and invest in a country where rates are higher, like Mexico.
According to the IIF analysis, led by IIF senior economist Jonathan Fortun, the carry boost will not be permanent, especially as the normalization of global monetary policy continues, which may gradually alter financing dynamics.
In the analysis they explained that as long as dollar conditions remain, in general terms, favorable and the risks to global growth do not intensify abruptly, “portfolio flows to emerging markets are likely to remain constructive in the coming months, although with greater differentiation between countries and instruments.”
The carry and the Mexican posture
The governor of Bank of Mexico, Victoria Rodríguez Ceja, explained the impact of what she called carry on the exchange rate, during the 2025 press conference.
“Low levels of implied volatility have contributed to the construction of carry positions that benefit from the interest rate differential between Mexico and other developed economies, which has been a factor that has benefited the peso.”
The rate differential is the so-called “relative monetary stance” which, as members of the Governing Board of Banco de México have explained, is also taken into account by the central bank in the recalibration of monetary policy.
As the interest rates of the United States and Mexico are reduced, the differential between the two is adjusted, which in certain circumstances has an impact on the exchange rate and this on the prices of goods.
The rate differential with the United States has dropped from 575 basis points where it was at the peak of the monetary restriction, in October 2023 to a range that goes from 325 to 350 basis points, while the one that prevails with Japan is 625 basis points.
In October, the IMF warned that some emerging market currencies are often used as futures hedges.
The IIF is the largest international association of financial institutions operating worldwide. Its members include Dubai International Finance Center, Bank OF China; Wells Fargo; Santander; Standard & Poor’s; Main, Moodys; Metlife, Banorte, BBVA, among others.
