Investors Favor Swiss Franc Over Yen For Carry Trades

What’s going on here?

Investors are increasingly favoring the Swiss franc over Japan’s yen to fund carry trades due to its lower interest rates and safe-haven status.

What does this mean?

The yen, typically a go-to for carry trades, took a hit in August when unexpected weak US economic data and a rate hike by the Bank of Japan sparked market instability. In contrast, the Swiss franc’s appeal has grown, supported by a 1.25% interest rate set by the Swiss National Bank and its reputation as a safe haven. Even though speculators hold a $3.8 billion short position against the franc, they are now $2 billion long on the yen – a notable shift in investor strategy. Analysts from Edmond de Rothschild and Bank of America underline the franc’s renewed allure. However, Deutsche Bank warns of the risks involved in using a safe-haven currency to fund carry trades, particularly in volatile conditions.

Why should I care?

For markets: It’s all about finding stability.

The Swiss franc’s lower rates and safe-haven characteristics make it an appealing funding currency, especially with the yen exhibiting two-way risks. The franc-dollar pair is particularly reactive to US economic data, often gaining value when US Treasury yields drop. The franc saw a rapid 3.5% rally over two days in August’s turbulent market scenario, highlighting the currency’s volatility. Investors in carry trades are advised to monitor the Swiss franc closely and maintain an agile exit strategy during risk-off periods.

The bigger picture: Balancing growth and safety.

Both Bank of America and Goldman Sachs suggest exploiting the significant interest rate differential between Switzerland and Britain by buying sterling against the franc. Moreover, the Swiss National Bank’s intervention in August to prevent further franc appreciation speaks to the delicate balance needed to safeguard Swiss exporters. As inflation falls, SNB is likely to cut rates further, reducing franc borrowing costs. Yet, the franc’s propensity for sudden rallies, especially in risk-averse environments, necessitates caution among investors.