State Street and Citigroup See Franc Replacing Yen for Carry Trades

(Bloomberg) — Traders are starting to turn to the Swiss franc as the top choice for funding carry trades instead of the yen, potentially alleviating pressure on the Japanese currency.

The franc has plunged since Switzerland’s central bank unexpectedly cut interest rates last month, leading both State Street Global Advisors and Citigroup Inc. to see it as the prime candidate for carry traders looking to borrow in a weakening currency. With the Bank of Japan making a historic move the other way to lift rates, both are also betting the yen will gain ground against the franc.

“It’s really been the yen as the only funder in G-10 and now that the policy cycle has started to change, the franc qualifies as a more attractive funder,” Aaron Hurd, a senior portfolio manager for currencies at State Street, said in an interview. “We’ve certainly seen some rotation from the yen as the sole funder to a basket of Swiss franc and yen.”

Hurd, who manages around $10 billion in active currency strategies, is positioned for the franc to weaken against the yen. That’s already been one of the top-performing currency trades since the SNB’s surprise decision to cut interest rates on March 21, with the yen rallying more than 2% against the franc since then.

Candriam is also betting that the franc will fall against the yen. Jamie Niven, senior fixed-income fund manager at the €140 billion ($152 billion) investment firm, expects further monetary policy divergence between the two central banks.

Read more: Neuberger Berman Spurns Yen for Swiss Franc as Top Carry Funder

The pivot to using the franc for carry trades — a strategy of borrowing in low-yielding currencies to fund positions in higher-yielding ones — could ease stress in the yen. While its decline has slowed since the BOJ rate hike on March 19, it slipped to a 34-year low last week and is flirting with a 152 per dollar level that many say would force Japanese authorities to intervene to prop it up. Options traders are also betting 152 or 153 will be a line in the sand.

Citigroup forecasts the franc-yen currency pair will fall to around 160 yen per franc by year-end, from around 167 now, as the difference in interest rates between Switzerland and Japan continues to shrink. The bank sees the SNB lowering its policy rate by 50 basis points to 1% or below this year and the BOJ hiking to 0.5% by the end of next year.

“Some of the downward pressure as a funding currency that to date has been concentrated on the Japanese yen should shift to the Swiss franc, and thereby contribute to an overall diminishing of downward pressure on the yen,” currency strategists including Osamu Takashima wrote in a note.

–With assistance from Alice Gledhill.

(Updates to add Candriam’s short franc-yen position.)

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