Swiss Franc Gains Favor Over Yen in Carry Trade Shift

Currency traders are reassessing the attractiveness of yen-funded carry trades due to rising volatility and potential official support for the Japanese currency, according to Reuters.

A carry trade involves borrowing in a low-rate currency, selling it, and using the proceeds to buy higher-yielding assets. However, if the funding currency appreciates rapidly, the small interest-rate advantage can be wiped out by exchange-rate fluctuations.

The Swiss franc is emerging as a cleaner alternative for carry traders due to its lower interest rate of around 0% compared to Japan's 1%. Analysts note that the franc has historically been less volatile than the yen.

If more traders switch to funding their trades with francs, they will typically sell the currency first, adding supply and potentially nudging EUR/CHF higher over time. This could lead to a weaker franc, benefiting Switzerland's export-heavy companies by reducing the currency headwind on foreign sales.