Swiss Franc's Role as Funding Currency Grows – ING

ING analyst Chris Turner's latest view suggests that current low market volatility is weighing on the Swiss franc and the Japanese yen. In this context, investors are increasingly inclined to use the Swiss franc as a funding currency to avoid the risk of potential intervention by Japanese authorities in the yen. Shorting the Swiss franc/Japanese yen cross is being viewed by the market as a positive carry trade to express a bullish view on the yen.

**Funding Currency Shift in a Low-Volatility Environment**

Typically, the yen is the traditional funding currency in carry trades, but recent verbal warnings and potential intervention threats from Japanese authorities have increased the risk of shorting the yen. ING notes that investors are therefore turning to the Swiss franc for funding. This preference also reflects market bets that the Swiss National Bank (SNB) will not intervene to prevent excessive franc appreciation, as sustained one-sided FX intervention could draw scrutiny from the U.S. Treasury. At the time of writing, the Swiss franc/yen is trading near 196.56772.

**The Strategic Logic of Shorting CHF/JPY**

Shorting the Swiss franc/yen is seen as a "positive carry" approach—borrowing the low-yielding Swiss franc to invest in other higher-yielding assets or currencies while simultaneously expressing a view on relative yen strength. The core of this strategy lies in traders earning interest rate differentials without directly facing the risk of official intervention that comes with shorting the yen. ING's analysis indicates that, in the current macro environment, using the Swiss franc as the funding leg to build yen long positions is gaining broader acceptance among market participants.

**Policy Risks and Market Dynamics**

The SNB's monetary policy stance is a key variable in this trade. Market signals suggest that while the SNB has historically intervened in the FX market to curb excessive franc appreciation, its willingness to do so now may be constrained by potential pressure from the U.S. Treasury. This leaves the franc's movement more driven by market rate differentials and risk sentiment, providing carry traders with a relatively stable funding environment. However, any major shift in global growth or monetary policy expectations could quickly alter the low-volatility landscape, thereby affecting the attractiveness of this strategy.