- US actively participated in defending the yen for the first time since 2011 around July 30.
- The yen rallied as much as 5% intraday following the intervention.
- Following the yen intervention, investors set sights on the Swiss franc for popular carry trades.
- Analysts point to the low-yielding Swiss franc as an obvious alternative for carry trades.
- A weaker Swiss franc could be an unexpected consequence of the recent U.S.-Japanese intervention, benefiting Swiss exporters.
- With borrowing costs pinned down by the Swiss National Bank, the franc stands out as an obvious carry trade alternative to the Japanese currency.
- Not only are Swiss rates lower than the Japanese yen, but franc volatility is lower as well.
- A coordinated intervention worth an estimated $75-85 billion has begun reshaping global forex dynamics.
- If carry traders increasingly borrow in Swiss francs to fund their positions elsewhere, that selling pressure naturally weakens the currency.
- A weaker franc means Swiss goods become cheaper for foreign buyers.
The Swiss franc is gaining traction as a carry trade alternative following a rare U.S.-Japan intervention aimed at supporting the yen. This intervention, estimated at $75-85 billion, has reshaped forex dynamics, potentially benefiting Swiss exporters by weakening the franc.
Analysts highlight the low-yielding Swiss franc as an obvious choice for traders seeking alternatives to the Japanese yen. With borrowing costs maintained by the Swiss National Bank, the franc's appeal is further enhanced by its lower volatility compared to the yen.6
Bank of America has recommended selling the Swiss franc against the yen, targeting 190 yen per franc, down from 196 yen before the intervention. The initial results of the intervention saw the yen rallying as much as 5% intraday, prompting traders to explore the franc as a substitute.
A weaker franc could make Swiss goods more affordable for foreign buyers, providing relief to companies that have struggled with a strong currency. If carry traders increasingly borrow in Swiss francs, this selling pressure could further weaken the currency, benefiting exporters in the long run.910
The coordinated intervention has introduced a new risk premium into yen-funded carry trades, with the key variable being whether the yen remains stable near 158-159 or drifts back toward the 164 level that triggered the intervention.
“The coordinated intervention, estimated at $75-85 billion, has reshaped forex dynamics, potentially benefiting Swiss exporters by making their goods cheaper for foreign buyers. Analysts note that if carry traders increasingly borrow in Swiss francs, this selling pressure could further weaken the currency.”
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