SWISS FRANK CHALLENGES YEN SUPREMACY IN GLOBAL CARRY TRADE MARKETS
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<span class="ifr-article-header__image-caption"/>The Swiss franc is increasingly challenging the yen’s dominance as the financing currency for carry trades in the $9.6 trillion‑per‑day Forex market, driven by rising Japanese interest rates that compress the profitability of yen‑funded positions.
A carry trade involves accessing a low‑yielding baseline currency—such as the yen—to obtain exposure to a higher‑yielding currency, like the Mexican peso. The objective is to capture returns from the interest‑rate spread between the two markets; the broader the spread, the larger the potential reward.
Decades of unusually low interest rates in Japan transformed the yen into the default funding instrument for these prevalent investing techniques. However, that landscape is evolving, traders note, as the Bank of Japan has elevated rates toward a 31‑year high in an effort to curb inflation.
Entering the spotlight, the Swiss franc has risen to potential prominence among FX carriers, spurred by the Swiss National Bank maintaining near‑zero policy rates—a stark contrast to fellow advanced economies facing tighter conditions.
“The public perception of the yen as a carry‑trade funding vehicle has undeniably shifted, and the Swiss franc is now largely viewed as the de facto standard for such portfolios,” says Dominic Bunning, G10 FX strategy lead at Nomura. “Client appetite for using the yen as a carry currency has grown considerably wary.”
The Declining Yen Dominance?
The yen carry trade has historically been one of the most embraced investment approaches in financial circles, leveraging Japan’s protracted period of nominal interest‑rate compression. Large‑scale unwinding of these positions—most recently in August 2024—has sparked market turbulence and prompted heightened regulatory scrutiny.
Quantifying the total size of the yen carry remains difficult. Yet, cross‑border yen borrowing—serving as a proxy for the trend—surpassed ¥360 trillion (about $2.28 trillions) by March, according to Jefferies’ analysis of Bank for International Settlements data. That figure represents the largest build‑up of such positions in the past three decades, Jefferies reported.
Nevertheless, Japan’s changing macroeconomic backdrop is eroding the yen’s suitability as a funding asset, specialists observe. The BoJ raised its policy rate to 1.25 percentage points in September—the level last observed in the mid‑1990s. Forecasts indicate rates may approach 2 percent by early next year.
Higher Japanese rates raise the cost of yen borrowing while narrowing the yield gap with other currencies, which directly depresses the incentive for yen‑based carry strategies. By contrast, Switzerland’s zero interest rate renders the franc markedly more appealing to those seeking leverage and positive carry spread.
“It has become remarkably fashionable as an alternative to the Japanese yen,” remarks Kit Juckes, chief global FX strategist at Societe Generale. “The Swiss frank aligns well with current conditions—its zero rates provide substantial leverage for carry generation.”
The Frank Currency Test
Critics caution that the franc alone does not guarantee success. Its revered safe‑haven characteristics tend to fuel rapid depreciation during periods of market turmoil, amplifying volatility and potentially offsetting gains from carry positioning.
For instance, the franc surged roughly 2 percent against the euro since late September amid concerns over France’s fiscal obligations, underscoring that reliability is lacking as a funding tool, according to Ing’s Nahed Ahmed, director of FX options for Europe.
“Even though the franc enjoys a zero rate and carries favorable dynamics for the underlying carry, its safe‑haven allure outweighs any benefit derived from sale‑and‑carry mechanics,” asserts Juckes. “A fundamental risk persists whenever the franc is employed as funding—its demand spikes make continuous performance uncertainty.”
New Frontier
While the franc will not supplant the yen outright due to its strong demand profile, it is positioned as a viable funding alternative, attracting sophisticated dealers to open new tenor and currency pairings.**
Switzerland’s disciplined fiscal stance and modest inflation trajectory reduce the likelihood of further rate hikes by the Swiss National Bank that could adversely affect these strategies, analysts argue.
This outlook contrasts sharply with an unpredictable path for the BoJ and the yen. Recent interventions—including a landmark bilateral operation with the United States after the yen hit a four‑decade low at ¥164 against the dollar on July 23—have collectively pushed the pair above ¥157 by July 31, establishing multi‑month support levels.
“The notion of sustaining short‑yen positions while assuming favorable FX movement outcomes has been severely tested,” warns Bunning. “Compounded effects of narrowed interest‑rate spreads and heightened yen appreciation render the yen an unattractive carrier in today’s climate.”
