Swiss Franc: Funding Currency Role Strengthens as Volatility Stays Low – ING

In a low-volatility environment, the Swiss franc's appeal as a funding currency is strengthening. ING analyst Chris Turner notes that the recent sharp drop in USD/CHF is more a result of position adjustment, as a previously hawkish Federal Reserve narrative had been supporting long positions. USD/CHF is currently trading around 0.80042, with low volatility continuing to pressure traditional funding currencies like the franc and the yen.

**Funding Substitution Logic: Avoiding Intervention Risk**

A key motive for investors shifting to franc funding is to avoid policy intervention. Although the yen has long been favored for funding trades due to its deeper liquidity pool, the potential risk of FX market intervention by Japanese authorities has deterred some investors. Shorting CHF/JPY is seen as an alternative strategy to express a view on the yen, with the added benefit of a positive interest rate differential. With Swiss rates currently at 0% and Japanese rates having risen to 1%, the franc's borrowing costs are relatively lower, further reinforcing its funding currency role.

**Policy Rate Anchor Influences Outlook**

The Swiss National Bank's policy path of anchoring rates at zero continues to shape the franc's trajectory. Analysts suggest that for EUR/CHF to move toward the 0.95 level, higher oil prices and an overall higher interest rate environment would likely be needed. Until that macro backdrop changes, the combination of low rates and low volatility is expected to keep the franc under pressure, potentially further solidifying its funding currency role. Investors should monitor global rate trends and the SNB's subsequent policy signals.