Swiss Franc Gains Appeal as Alternative Funding Currency

Key Moments

Funding Dynamics in CHF and JPY

Chris Turner at ING notes that subdued market volatility is exerting pressure on key funding currencies, including the Swiss franc and Japanese yen. According to the commentary, investors still often look to the yen as a funding currency because of its deeper liquidity, but an increasing shift toward funding in francs is anticipated.

The preference for franc funding is attributed to comparatively lower borrowing costs and a desire by some market participants to reduce exposure to the risk of abrupt yen-supportive intervention from authorities in Tokyo and Washington.

Short CHF/JPY as a Carry-Positive Yen Expression

Turner points to short CHF/JPY positions as a strategy that could gain traction among investors who expect foreign exchange intervention to influence the yen.

“And if investors do believe intervention is going to be effective, short CHF/JPY positions will become increasingly popular. This is not only because short CHF/JPY is one of the few ways to express a carry-positive yen view, but because the two currencies have similar investment characteristics.”

EUR/CHF Outlook and SNB Policy Context

On the EUR/CHF cross, Turner links a potential move toward 0.95 to an environment of rising Oil prices and a broad-based increase in interest rates. In this scenario, the Swiss National Bank’s firmly anchored zero-rate policy is described as a factor that could contribute to relative underperformance of the franc.

“As to EUR/CHF, a break towards 0.95 probably requires higher oil prices and higher interest rates across the board, where the Swiss National Bank’s anchored zero rate policy leads to franc underperformance.”