Swiss Franc Gains Traction as Funding Currency Amid Low Volatility

The Swiss Franc (CHF) is gaining appeal as an alternative funding currency due to its low volatility and relatively lower borrowing costs compared to other major currencies.

According to Chris Turner at ING, subdued market volatility is putting pressure on key funding currencies, including the CHF and Japanese Yen (JPY). While investors often look to the JPY as a funding currency due to its deeper liquidity, there's an increasing shift toward funding in francs.

The preference for franc funding is attributed to lower borrowing costs and a desire by some market participants to reduce exposure to the risk of abrupt yen-supportive intervention from authorities in Tokyo and Washington. Turner notes that short CHF/JPY positions could gain traction among investors who expect foreign exchange intervention to influence the JPY.

A potential move toward 0.95 on the EUR/CHF cross is linked to rising Oil prices and a broad-based increase in interest rates, with the Swiss National Bank's firmly anchored zero-rate policy contributing to relative underperformance of the franc.