The Swiss franc is emerging as a potential alternative funding currency as traders reassess the risks of borrowing yen following recent intervention by Japan and the United States. Source: REUTERS
SOURCE: REUTERS
Global currency investors are beginning to look more closely at the Swiss franc as an alternative currency for carry trades after authorities intervened to support the Japanese yen.
The yen has traditionally been one of the most widely used funding currencies because of Japan's relatively low interest rates. Investors borrow yen at a low cost and use the funds to purchase assets or currencies offering higher returns. However, recent intervention by Japan and the United States to strengthen the yen has increased the risk for traders holding positions against the Japanese currency.
Why the Swiss franc is attracting attention
The Swiss franc is also considered a low-cost funding currency. Switzerland's interest rate is currently around 0%, compared with Japan's rate of about 1%, making borrowing in francs relatively inexpensive. The franc has also shown lower volatility than the yen, another factor that can make it attractive for carry-trade strategies.
Under a typical carry trade, an investor borrows a currency with a low interest rate and converts the money into another currency or asset offering a higher return. The investor attempts to profit from the interest-rate difference, although movements in exchange rates can quickly turn the trade into a loss.
Yen intervention changes investor calculations
The recent intervention has made investors more cautious about relying heavily on the yen as a funding currency. Japan and the United States have taken steps to support the Japanese currency after it weakened sharply against the dollar. Although the intervention temporarily strengthened the yen, the currency has remained under pressure.
For carry traders, a sudden strengthening of the funding currency can be costly. If an investor has borrowed yen and the yen rises significantly, repaying that borrowing becomes more expensive in terms of the investor's other holdings.
This creates an additional risk that investors must consider alongside the potential returns from the carry trade.
Swiss franc has already weakened
The Swiss franc has recently moved lower after reaching strong levels earlier this year. According to Reuters, the franc has fallen roughly 4% against the euro from its March peak and around 7% against the U.S. dollar from its January high.
A weaker franc could also benefit Switzerland's export-oriented economy because Swiss goods become relatively less expensive for international customers.
For the Swiss National Bank, a softer currency could reduce some of the pressure created by an excessively strong franc. The central bank has previously used currency intervention as one of its tools when the franc becomes too strong.
The shift is still at an early stage
Despite the growing interest in the Swiss franc, investors have not abandoned the yen. The Japanese currency remains highly liquid and deeply established in global financial markets.
Instead, the recent developments could encourage some investors to diversify their funding positions and use the franc alongside the yen.
The potential shift highlights how government intervention can influence global currency strategies beyond the country directly involved. If more investors begin borrowing Swiss francs to finance higher-yielding investments elsewhere, additional selling pressure could emerge against the franc.
For now, however, the move remains at an early stage. The yen is still an important funding currency, while the Swiss franc is increasingly being considered as a possible alternative.
Source : Reuters