Swiss franc emerges as carry trade alternative after US-Japan yen intervention

The Swiss franc is emerging as a leading alternative funding currency in global carry trades after the rare joint intervention by the United States and Japan to prop up the yen earlier this month sent ripples through foreign exchange markets.

Intervention Reshapes the Carry Trade Landscape

On August 3, Japan and the United States confirmed their first coordinated yen-buying intervention since 2011, acting to halt the Japanese currency's slide to 40-year lows against the dollar. The operation, which Goldman Sachs ↘ 0.08% estimated at up to $85 billion over the initial days beginning July 30, was described by U.S. Treasury Secretary Scott Bessent as a sign that Washington "will not hesitate to participate in further joint intervention".aljazeera+1

The scale and rarity of the action has introduced a new risk for traders who had relied on the yen as their preferred low-cost borrowing currency. According to Reuters Thomson Reuters Corporation ↗ 1.43%, investors are now setting their sights on the Swiss franc as an alternative for popular carry trades, given intervention risk has made the yen more volatile.reuters

Why the Franc Fits

The Swiss National Bank maintains an interest rate of 0%, compared with 1% in Japan, making the franc cheaper to borrow. Fredrik Repton of Neuberger Berman noted that "market participants will be considering shifting some of their funding positions," while Bank of America ↗ 0.96% has a long-standing recommendation to sell the franc against the yen with a target of 190 yen per franc.mezha+2

"Not only are Swiss interest rates lower than in Japan, but franc volatility is also lower," said Adarsh Sinha of BofA, explaining the appeal.mezha

The EUR/CHF pair stood near 0.9385, the franc's weakest level against the euro in roughly a year, having fallen about 4% since reaching an 11-year high in March. Rabobank raised its nine- to 12-month target for the pair from 0.94 to 0.95.mezha

Early Stages of a Structural Shift

Chris Turner of ING cautioned that "it will take quite some time to move away from the yen as a funding currency," given its deep liquidity. But the combination of Japan's desire for a stronger yen and Switzerland's tolerance for a weaker franc could accelerate the transition. A weaker franc would align with the Swiss National Bank's longstanding preference for curbing excessive currency appreciation.ua+1

Turner characterized the shift as still in its "early stages," but added that multiple forces — including expectations of further Japanese rate hikes and potential repatriation by Japan's Government Pension Investment Fund — are making investors more cautious about betting against the yen.mezha