Investors set sights on Swiss franc for popular carry trades after yen intervention

• Swiss interest rates are currently at 0% compared to Japan's 1%, making the franc an attractive alternative funding currency with lower volatility than the yen
• The franc has already softened about 4% from its March 11-year peak against the euro, trading near 0.9385, with Rabobank revising its 9-12 month target to 0.95
• Multiple factors are reducing yen appeal for carry trades: intervention risk, Japanese rate-hike expectations, and speculation about Japan's Government Pension Investment Fund shifting toward domestic investments

Summary: Swiss Franc Emerges as Alternative for Carry Trades Amid Yen Intervention Risk

Investors are increasingly turning to the Swiss franc as a funding currency for carry trades, driven by intervention risks surrounding the Japanese yen. This shift could weaken the franc, bringing welcome relief to Swiss policymakers and exporters who have struggled with currency strength for years.

Key Developments:

• The franc remains 12% stronger against the euro versus five years ago, hurting Swiss exports and economic growth
• Recent U.S.-Japanese interventions to support the yen have prompted traders to rotate carry trade funding positions toward the franc
• The franc has already weakened 4% from March's 11-year peak near 0.90 versus the euro, currently trading around 0.9385
• Rabobank raised its 9-12 month euro/Swiss franc target to 0.95 from 0.94

Carry Trade Dynamics:

Carry trades involve borrowing low-yielding currencies to invest in higher-yielding assets. The franc offers advantages over the yen:

• Swiss interest rates at 0% versus Japan's 1%
• Lower volatility than the yen
• No intervention risk unlike the yen

Bank of America recommends selling the Swiss franc against the yen, targeting 190 yen per franc from current levels around 196 yen.

Market Implications:

• A weaker franc would benefit Swiss exporters and align with Swiss National Bank preferences
• The SNB has indicated willingness to intervene if necessary to weaken the currency
• Japanese rate hike expectations and potential GPIF portfolio shifts toward domestic assets are also affecting yen dynamics
• Analysts view this trend as early-stage but gaining momentum, given opposing policy objectives: Japan wants a stronger yen while Switzerland seeks a weaker franc