Carry trades pivot toward the Swiss franc

Swiss franc banknotes on a trading desk illustrating FX carry trades pivot toward CHF funding

Key Points

01Carry traders are rotating some funding positions into the Swiss franc
02Heightened yen volatility and a coordinated yen intervention triggered the shift
03Swiss policy rates near 0.0% versus Japan’s around 1.0% support franc funding
04Short CHFJPY is gaining attention as a carry-positive strategy that involves selling Swiss francs and buying Japanese yen, allowing investors to express views on relative yields while shifting funding exposure.

Carry traders reassess funding currencies

Currency markets have seen a notable adjustment in carry-trade positioning following renewed volatility in the Japanese yen and a rare coordinated intervention to support it. Market participants are beginning to rotate some funding positions away from the yen and toward the Swiss franc, reflecting a reassessment of the risks tied to using the yen as the primary funding currency.

Carry trades typically involve borrowing in low-yielding currencies to invest in higher-yielding assets. The recent official action to support the yen has reminded investors that heavily short-yen positions can be vulnerable to sudden, policy-driven reversals, prompting a search for alternative low-rate funding options.

Swiss franc emerges as an alternative funding base

Strategists report growing interest in the Swiss franc as a funding currency for carry trades. ING head of FX strategy Chris Turner has highlighted that investors are increasingly favouring franc funding as a way to sidestep the risk of further Japanese official intervention in the currency market.

This shift is supported by the prevailing interest-rate backdrop. Analysis citing market participants notes that Swiss policy rates are around 0.0%, while Japanese short-term rates are around 1.0%. This differential makes borrowing in francs relatively attractive for certain carry structures compared with borrowing in yen.

The franc’s reputation for relatively steady, low-volatility trading conditions is also seen as part of its appeal for funding strategies. For investors structuring leveraged positions, a less volatile funding currency can help limit swings in funding costs and margin requirements.

Rising focus on short CHF/JPY structures

Within this broader repositioning, short CHFJPY trades are drawing particular attention from trading desks and strategists. These structures involve selling Swiss francs and buying Japanese yen, and are described as carry-positive given the rate gap between the two currencies.

Short CHFJPY is being highlighted as a way to maintain a bearish stance on the yen while reducing exposure to the specific risk of direct short-yen positions that might be hit by further official yen-buying. By shifting the focus to the franc as the funding leg, investors can express their views on relative policy and yield dynamics in a different way.

Market commentary suggests that if this rotation into franc-based funding continues, it could become an important driver of flows between the Swiss franc and the Japanese yen. The evolution of interest-rate differentials and any further policy actions will likely remain central to how these strategies develop.

Key Takeaways

01The yen’s role as a dominant funding currency is being challenged as investors respond to recent volatility and official intervention.
02The Swiss franc’s low policy rate and relatively stable profile are making it an increasingly important funding currency in carry strategies.
03Short CHFJPY has become a key expression of views on relative yields and policy, offering a carry-positive structure while aiming to limit direct intervention risk on yen shorts.

References