In an article published in L'Agefi, Daniel Varela, Chief Investment Officer at Piguet Galland, highlights a notable shift taking place in currency markets: the Swiss franc appears to be increasingly replacing the Japanese yen as a preferred funding currency for certain carry trade strategies.
A carry trade involves borrowing in a low-yielding currency and investing in assets that offer higher returns. With the Swiss National Bank's policy rate currently at 0%, the Swiss franc has once again become particularly attractive for this type of strategy.
According to Daniel Varela, several factors are contributing to this trend. Increased volatility in the yen, combined with the possibility of intervention by Japanese authorities, has encouraged some investors to seek alternative funding currencies. Against this backdrop, the Swiss franc is emerging as a credible substitute.
This shift is already visible in investor positioning. CFTC data shows an increase in short positions on the Swiss franc, while bearish positions on the yen have been gradually declining.
Investors using these strategies borrow Swiss francs, convert them into higher-yielding currencies and invest the proceeds in overseas markets. These transactions naturally create downward pressure on the Swiss currency.
For Daniel Varela, this may help explain a development that has surprised some observers. Despite continued geopolitical uncertainty, the Swiss franc has weakened in recent months. This trend does not necessarily point to weaker Swiss economic fundamentals, but may instead be amplified by the financial flows generated by carry trade activity.
The analysis also raises an important question for investors. By keeping its policy rate at 0%, the Swiss National Bank is indirectly increasing the appeal of the Swiss franc as a funding currency.
This creates an interesting paradox: a currency historically associated with its safe-haven status may now be playing an increasingly important role in global carry trade strategies.
Read Daniel Varela's full analysis in L'Agefi (French only)