The Swiss franc is strengthening against the euro, driven in part by the unwinding of a popular carry trade. Investors have long borrowed in Swiss francs to invest in higher-yielding currencies, but the franc’s recent rally has eroded those returns. Year-to-date gains from selling the franc and buying the euro dropped to just 0.1% last week, down from 3.4% at the end of September. While some asset managers are reducing their bearish franc positions, leveraged funds remain heavily short, setting the stage for potential further gains if risk aversion continues.
The franc’s surge has taken it to its strongest level against the euro since May, reaching 0.91376 per euro before a slight pullback. Analysts warn that a break below 0.90 could prompt intervention from the Swiss National Bank (SNB), though strategists expect the central bank to smooth sharp moves rather than halt the appreciation entirely. SNB officials have indicated readiness to act in currency markets if necessary.
Beyond speculative demand, the franc benefits from structural support due to Switzerland’s strong economy and low government debt. Rising Swiss inflation to 1.5% in October may also make policymakers more tolerant of the franc’s strength. Meanwhile, some investors prefer shorting the franc against the yen, viewing it as a safer bet given the yen’s undervaluation against the dollar.
With European political risks lingering, particularly in France, real-money investors remain cautious about betting on a weaker franc. Allianz’s Gregor Hirt notes that funding European assets with franc borrowing amounts to being short the regional haven against regional risk, a strategy he advises against while French spreads remain elevated.