Swiss Franc Gains Favor Over Japanese Yen for Funding Carry Trades

Investors are increasingly turning to the Swiss franc as a preferred option for funding carry trades, moving away from the traditional use of the Japanese yen. This shift is primarily attributed to the Swiss franc’s lower interest rates and its established status as a safe-haven currency.

The Japanese yen, which has long been a popular choice for carry trades, experienced significant declines in August. This decline was triggered by disappointing economic data from the United States, coupled with an unexpected interest rate hike by the Bank of Japan, creating instability in the market.

In stark contrast, the appeal of the Swiss franc has been bolstered by the interest rate set at 1.25% by the Swiss National Bank. Analysts from Edmond de Rothschild and Bank of America have highlighted this renewed interest in the franc, despite speculators maintaining a $3.8 billion short position against it. In a notable strategic shift, investors are now holding a $2 billion long position on the yen.

For market participants, the shift towards the Swiss franc suggests a growing emphasis on stability amid ongoing volatility. The movement of the franc-dollar pair has proven to be particularly responsive to U.S. economic data—gaining value during periods of declining U.S. Treasury yields.

During the tumultuous market conditions of August, the Swiss franc experienced a swift 3.5% rally over just two days, underscoring its attractiveness to investors seeking safety during uncertain times. Experts advise that those engaging in carry trades closely monitor the Swiss franc and maintain an agile exit strategy during periods of market turbulence.

From a broader economic perspective, analysts at Bank of America and Goldman Sachs recommend capitalizing on the notable interest rate differential between Switzerland and Britain by purchasing sterling against the franc. Moreover, the Swiss National Bank’s actions in August to curb further appreciation of the franc reflect the institution’s delicate balancing act to protect Swiss exporters.

As the value of the franc fluctuates, there is speculation that the Swiss National Bank may consider cutting interest rates further, which could lead to reduced borrowing costs in francs. However, investors are cautioned about the franc’s tendency to experience sudden spikes, especially in risk-averse market conditions.