The carry trade is one of the oldest and most enduring strategies in global currency markets. Its logic is simple, its execution is straightforward, and its history is a consistent alternation between long periods of quiet profitability and brief episodes of violent unwind that remind participants why the trade has always attracted as much fear as it has capital. Borrow in a currency where rates are low. Deploy the proceeds into markets where rates are higher. Collect the difference. Repeat until the environment changes.

For the better part of three decades, the currency that anchored the funding side of this trade was the Japanese yen. Japan’s sustained commitment to ultra-accommodative monetary policy, its near-zero and at times negative policy rates, and the stability of a currency whose central bank had historically been reluctant to allow significant appreciation made it the obvious choice for investors looking to borrow cheaply and deploy aggressively. The yen carry trade became one of the most crowded positions in global financial markets, a structural feature of how capital flows across the world’s major economies.

That structure is changing. And it is changing right now.

What Has Shifted in Japan

The Bank of Japan’s methodical normalization of monetary policy has been underway for several years and has proceeded at a pace calibrated to avoid the kind of abrupt market disruption that a sudden shift in the world’s primary carry funding currency would produce. But the direction is unambiguous. Japan has moved from negative policy rates, through zero, and is now meaningfully above the floor that made yen borrowing essentially free. The expectation among currency markets is that this normalization continues, which means the interest rate differential that made yen funding so attractive is narrowing from one side while central banks in higher-yielding markets hold or raise from the other.

The intervention dimension compounds the structural shift. Both Japanese authorities and the United States have taken the unusual step of coordinating action to support the yen in recent months, a signal of political commitment to preventing the yen from remaining as weak as pure market dynamics would otherwise produce. For investors whose carry trade depends on the funding currency remaining weak or weakening further, this intervention risk fundamentally changes the risk profile of a yen-funded position. The trade that was once a reliable income generator becomes one with a policy risk embedded in its structure, a risk that materializes suddenly and with considerable force when intervention occurs.

The accumulation of these factors, the rate normalization, the narrowing differential, the intervention risk, and the possibility that Japan’s largest institutional investors begin repatriating capital that has been deployed internationally, has created a specific incentive for carry trade practitioners to seek an alternative. They appear to have found one.

What Makes the Swiss Franc Attractive Now

The Swiss franc has always shared certain characteristics with the Japanese yen that made it a candidate for the funding role: low rates, low volatility, deep and liquid currency markets, and the quality of a safe-haven asset that draws capital during periods of global stress. What it did not have, for most of its recent history, was a policy environment that made the Swiss National Bank comfortable with a weakening currency.

That has changed. The Swiss National Bank has held its policy rate at the floor of the rate range that allows meaningful carry trade activity, and reports within the professional currency community suggest its intention to maintain this posture through at least the medium term. More significantly, the central bank has not only tolerated recent franc weakness, it has signaled a degree of comfort with it. For a currency that spent years frustrating Swiss exporters and policymakers through persistent strength, a central bank that welcomes weakness is a central bank that provides an unusually favorable backing for a carry trade funded in its currency.

The comparison between the two currencies at this moment is one that the market is making actively and with increasing seriousness. Swiss policy rates sit below Japanese policy rates. The volatility of the franc against major currency pairs has been lower than the volatility of the yen in recent months, a critical consideration for carry traders whose models are sensitive to the funding currency’s behavior. And critically, the intervention risk that now colors yen-funded positions does not exist in the same form for franc-funded positions. If anything, the Swiss authorities would prefer the franc to weaken further, which means the direction of potential policy action aligns with rather than against the carry trader’s interests.

” The Swiss Franc is Killing Two Birds With One Stone”

The Dual Characteristic of the Swiss Franc

The most intellectually interesting dimension of the Swiss franc’s emergence as a carry funding currency is the one that distinguishes it from most alternatives: the franc is simultaneously a cheap funding currency and a classic safe-haven asset.

This combination is unusual. Safe-haven currencies typically strengthen during periods of global stress, which creates a problem for carry trades that are funded in them. When risk sentiment deteriorates and investors flee to safety, the funding currency appreciates, and the carry trader faces the double penalty of an unfavorable move in the funding leg while the higher-yielding investment leg may also be declining. The yen’s safe-haven status was always a latent risk within the carry trade funded by borrowing it.

The Swiss franc shares this characteristic but in the current environment adds a dimension that modifies its behavior. A currency that functions as a safe haven when stress arrives but that is under carry-related selling pressure during calm periods has a different volatility profile than a pure risk-off currency. The franc absorbs these competing forces, and the result is a currency that does not behave uniformly in either direction, which, for the carry trader seeking stability in the funding leg, is a more favorable profile than a currency that moves sharply in either direction based on a single factor.

There is, in this observation, a meaningful insight about the evolving structure of global carry trade activity. The trade is not abandoning its yen position entirely. It is diversifying the funding leg across currencies, reducing concentration in any single funding currency whose policy path has become less predictable, and the franc is absorbing a portion of what the yen previously dominated.