The yen's role as a funding currency for Latin American carry trades remains solid.
After Brazilian President Lula's surprise election victory, the real fell sharply against the yen, but most other Latin American currencies rose against the yen, including the Chilean peso, Colombian peso, and Mexican peso.
This shows investors still have sustained demand for Latin American currencies, which have long been important destinations for investments funded by money borrowed in Japan.
"The fundamental drivers of carry trades remain intact," said Fukuhiro Ezawa, head of Japan financial markets at Standard Chartered Bank in Tokyo. "Real trading during Asian hours is relatively limited, and Japanese investors have not built large real positions. This suggests spillover effects on the Japanese market should remain limited."
Carry trade investors borrow yen and buy Latin American assets, typically benefiting from higher local interest rates, but if the relevant currencies depreciate sharply, the interest rate differential gains can also shrink significantly.
Lula's unexpected re-election as Brazil's president triggered a fierce sell-off in Brazilian assets on Monday, with investors worried he will not take sufficiently strong measures to address a rapidly deteriorating fiscal outlook.
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