Low volatility in global currency markets is reshaping how investors use the Swiss franc and Japanese yen, with the franc increasingly favored as a funding currency, according to ING’s head of FX strategy Chris Turner. In a note published this week, Turner highlighted that investors are turning to franc funding to sidestep the risk of Japanese intervention, making short CHF/JPY an attractive carry-positive way to express a bearish yen view.
The shift reflects a broader recalibration in the forex market as both currencies struggle under the weight of subdued volatility. For years, the yen was the go-to funding currency for carry trades, but repeated warnings from Japanese officials and sporadic intervention have made traders wary of holding short yen positions.
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Why the Franc Is Winning Favor
The Swiss National Bank has long maintained a policy of low interest rates, making the franc a cheap currency to borrow. But the key differentiator now, Turner argues, is the absence of intervention risk. While the SNB has historically intervened to weaken the franc, its recent stance has been more predictable compared to Japan’s increasingly active approach to propping up the yen.
Data from the Bank for International Settlements and recent positioning reports suggest that speculative accounts have been rotating out of yen-funded trades and into franc-funded ones. This rotation has been particularly visible in crosses like EUR/CHF and GBP/CHF, where the franc is being sold against higher-yielding currencies.
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Turner noted that the franc’s low volatility profile makes it an ideal funding vehicle. “The franc offers the stability that traders want in a funding currency, but without the policy uncertainty that now surrounds the yen,” he wrote.
Short CHF/JPY: A Carry Trade With a Twist
The specific trade gaining traction is short CHF/JPY — selling francs and buying yen. At first glance, this seems counterintuitive, as both are low-yielding currencies. But the carry comes from the interest rate differential between the two, which has widened in favor of the franc.
More importantly, the trade allows investors to express a view on the yen without directly risking intervention losses. If Japanese authorities step in to buy yen, a short yen position would suffer immediate losses. By using the franc as the funding currency instead, traders can maintain a bearish yen stance while reducing that specific risk.
ING’s analysis suggests that this dynamic could persist as long as the Bank of Japan remains committed to its ultra-loose monetary policy, which has kept the yen under pressure despite occasional bouts of official buying.
What This Means for Forex Markets
The growing use of the franc as a funding currency has implications beyond just the CHF/JPY cross. It could lead to a more persistent weakening of the franc against other major currencies, particularly if the SNB remains comfortable with the current policy stance.
For traders, the shift underscores the importance of monitoring intervention risk when choosing funding currencies. It also highlights how central bank policy divergence continues to drive cross-currency dynamics in an environment where overall volatility remains suppressed.
Looking ahead, market participants will be watching for any signals from the Bank of Japan regarding policy normalization, as well as any comments from Swiss officials that might hint at a change in their approach to the franc. Until then, the franc’s role as a funding currency seems likely to grow.
This article is for informational purposes only and does not constitute financial advice. Forex trading involves significant risk and may not be suitable for all investors. Past performance is not indicative of future results.
