Carry Traders Eye Franc, Krona as Yen’s Funding Appeal Ebbs

(Bloomberg) — Currencies such as the Swedish krona and Swiss franc are emerging as prime candidates to finance carry trades as the yen’s recent surge makes it a less reliable bet than in the past.

Russell Investments Ltd., and Allianz Global Investors favor the franc, citing a widening monetary-policy divergence between Switzerland and Japan, while JPMorgan Chase & Co strategists recommend the Swedish krona and the Canadian dollar as attractive options.

All those are vying to replace the yen in carry trades, where investors borrow in low-yielding currencies to buy higher-yield assets. For decades, the yen was traders’ currency of choice to sell but now its appeal is fading as Japan’s bond yields rise and joint US-Japanese intervention to support it underscored a preference for higher Japanese interest rates and a stronger yen.

“Investors still want to be engaged in the carry trade, but the funding leg is the interesting question,” Van Luu, global head of FI and FX solutions strategy at Russell Investments.

He said that by intervening twice this year to support the yen and preparing investors for higher interest rates, Japan has effectively signaled it wants a stronger yen. Switzerland, in contrast, is set to keep rates at zero until end-2027, and appears content to let the franc slide to support its exporters.

“If people migrate their funding currency from the yen to something else, then from a valuation perspective, from a monetary policy and exchange-rate policy perspective, the Swiss franc becomes the most appealing,” Luu added.

Returns show the attraction of yen-funded carry trades is waning. Selling yen to buy the Australian dollar, the highest-yielding Group-of-10 currency, would have generated a 1.3% loss since July, versus a 9% profit in the first half of this year. In contrast, anyone using the Swiss franc, would have reaped total gains of 14% in 2026.

Read: Bessent Dares Traders to Bet Against Yen: ‘I Am the House’

The yen has gained about 3% this month and rose by a similar amount in July after the intervention, while Japan’s two-year bond yields have more than doubled this year. The franc on the other hand has come under selling pressure, shedding more than 1% against the dollar and over 4% to the yen.

“Selling the franc and buying yen was very much a reflection of the longer-term shift in the use of funding currencies,” said Neil Jones, managing director, FX sales and trading at TJM London.

That trade may not be without risk. The yen still has much greater liquidity than most of its peers, and carry strategies work when currencies are stable — but the franc is among the world’s leading haven assets and tends to surge during periods of geopolitical stress.

Greg Hirt, chief investment officer of multi-asset strategies at AllianzGI, sees the franc as a viable “complement” to the yen but also highlights potential for volatility around next year’s Italian and French elections.

“The Swissie is very much a safe haven in terms of European risk,” he said. “If indeed, there is an issue in France, you’ll have a much stronger Swiss franc.”

Japan’s interventions have also upended another long-standing equation that’s key to carry-trade returns. For decades, the yen was the currency most sensitive to US interest-rates, weakening as two-year Treasury yields rose. Other currencies have taken its spot.

Meera Chandan, JPMorgan’s co-head of global FX strategy, says Swedish krona and the Canadian dollar are most vulnerable as global rates rise because of their low yields and sensitivity to the economic cycle. She recommends selling both versus the dollar, which is being supported by expectations the Federal Reserve may raise rates twice this year.

“If you compare them to the high yielders in developed markets like Australia and Norway, or in emerging markets, which are even more high yielding, there’s actually a pretty big yield deficit,” Chandan said, adding that the franc and the New Zealand dollar also fit her bill.

The Swedish krona is the worst performing Group-of-10 currency against the dollar and the euro this year. It has continued to weaken this week, with the final result of a tight presidential election still pending.

(Updates moves in eighth paragraph, adds context on krona in final paragraph.)

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