Carry traders are increasingly turning to the Swiss franc as a funding source in the short term, as intervention risks and rising interest rates diminish the appeal of borrowing in Japanese yen. According to the latest data from the U.S. Commodity Futures Trading Commission (CFTC), for the week ending August 11th, hedge funds increased their net short positions in the franc to levels near a two-month high. Concurrently, they reduced their yen short positions for the second consecutive week.

"The market has recently increased short positions in the Swiss franc to finance carry trades in the foreign exchange market," said Tobias Jungmann, head of FX options for the Americas at Bank of America in New York. He noted that for emerging market carry trades funded by the franc, the ratio of volatility to carry yield also makes options an ideal tool for gaining exposure while managing risk.

The attractiveness of borrowing in Swiss francs stems partly from interest rates near zero in Switzerland and partly from the Swiss National Bank's willingness to curb the appreciation of its currency. In contrast, investors have become increasingly cautious about carry trades funded by the yen since late July, when interventions by Japan and the United States to boost the yen's exchange rate increased its volatility. Sources indicated last week that the Japanese government supports the Bank of Japan's decision to raise interest rates in the short term.

Carry trade is an investment strategy where investors borrow a currency with a relatively low interest rate and invest the proceeds in another currency with a higher yield, thereby earning the interest rate differential, also known as the "carry."

"There may still be some yen carry trades in the market, but after the massive intervention in 2024 severely impacted such trades, people are now more cautious," said Stephen Jefferies, head of currencies and emerging markets at JPMorgan in London. He stated that demand for alternative funding currencies such as the Swiss franc, the euro, and even the Taiwan dollar has increased recently.

The yen has long been an important funding currency for carry trades and thus still has many supporters. "The yen remains the world's primary funding currency, and recent interventions have done little to change that fundamental reality," said Markus Schmidt, head of European linear FX and local market rates trading at Credit Agricole CIB in London.