Swiss Franc Emerges as Carry Trade Favorite as Yen Intervention Risk Rises

Investors are beginning to favor the Swiss franc over the Japanese yen as the preferred funding currency for carry trades, a strategic shift prompted by recent U.S.-Japanese intervention to support the yen. The move has introduced significant volatility into yen trading, making the traditionally stable Swiss franc a more attractive alternative for strategies that rely on low currency swings.

A Rotation in Funding Currencies

The carry trade, a strategy where investors borrow in a low-interest-rate currency to invest in higher-yielding assets, has long been dominated by the Japanese yen. However, the risk of further official intervention to strengthen the yen has made holding short positions more perilous, prompting a re-evaluation among traders.

"Market participants will be thinking about rotating some of their funding positions," said Fredrik Repton, a senior portfolio manager at Neuberger Berman, in comments to Reuters. Analysts note that while it is difficult to measure the exact size of the carry trade, a decline in short positions against the yen suggests an unwinding of these bets.

The Franc's Appeal

The Swiss franc is emerging as a compelling alternative due to its low borrowing costs and, crucially, lower volatility compared to the yen. According to Adarsh Sinha, head of global G10 FX strategy at BofA, not only are Swiss rates lower than Japan's, but franc volatility is also lower. This stability is critical for carry trades, where sudden currency movements can erase profits from interest rate differentials.

The appeal of the franc is further supported by the policy stances of the respective central banks:

Ad

• The Swiss National Bank (SNB) has indicated it would welcome a weaker franc to support the country's export-driven economy and has previously intervened to achieve this.
• Japanese authorities, in contrast, are actively seeking a stronger yen.

"The Japanese want a stronger yen, the Swiss want a weaker franc, so it would make sense," noted Chris Turner, global head of markets at ING.

Market Impact and Outlook

This budding rotation is already visible in currency markets. The franc is trading near a one-year low against the euro at approximately 0.9385, having weakened about 4% from its March peak. It has also fallen nearly 7% from an 11-year high against the U.S. dollar set in January.

Reflecting this sentiment, Rabobank recently raised its 9- to 12-month forecast for the euro-franc pair to 0.95 from 0.94. Meanwhile, BofA maintains a recommendation to sell the Swiss franc against the yen, partly based on the view that funding trades in francs is now more attractive, according to Sinha.