Investors are increasingly favoring the Swiss franc over Japan's yen to fund carry trades due to its lower rates and safe-haven status.

The yen, typically a go-to for carry trades, took a hit in August when unexpected weak US economic data and a rate hike by the Bank of Japan sparked market instability.

In contrast, the Swiss franc's appeal has grown, supported by a 1.

25% interest rate set by the Swiss National Bank and its reputation as a safe haven.

Even though speculators hold a $3.

8 billion short position against the franc, they are now $2 billion long on the yen – a notable shift in investor strategy.

Analysts from Edmond de Rothschild and Bank of America underline the franc's renewed allure.

However, Deutsche Bank warns of the risks involved in using a safe-haven currency to fund carry trades, particularly in volatile conditions.

The Swiss franc’s lower rates and safe-haven characteristics make it an appealing funding currency, especially with the yen exhibiting two-way risks.

The franc-dollar pair is particularly reactive to US economic data, often gaining value when US Treasury yields drop.

The franc saw a rapid 3.

5% rally over two days in August's turbulent market scenario, highlighting the currency's strength.

Investors in carry trades are advised to monitor the Swiss franc closely and maintain an agile exit strategy during risk-off periods.

Both Bank of America and Goldman Sachs suggest exploiting the significant interest rate differential between Switzerland and Britain by buying sterling against the franc.

Moreover, the Swiss National Bank's intervention in August to prevent further franc appreciation speaks to the delicate balance needed to safeguard Swiss exporters.

As fall approaches, SNB is likely to cut rates further, reducing franc borrowing costs.

Yet, the franc's propensity for sudden rallies, especially in risk-averse environments, necessitates caution among investors.

These articles are provided for information purposes only.

Occasionally, an opinion about whether to buy or sell a specific investment may be provided.

The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation, or your investment objectives.

The value of your investments, and the income derived from them, may go down as well as up.

You may not get back all the money that you invest.

The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

This article may contain AI-edited content.

While efforts have been made to ensure accuracy, AI may not capture the nuances of the subject matter resulting in errors or inconsistencies.