In the world of currency trading, the dynamics of market behavior can shift dramatically based on the monetary policies of central banksA notable recent development is the emerging role of the Swiss Franc (CHF) as a favorable currency for carry trades, a position long held by the Japanese Yen (JPY). Carry trades, a popular strategy among investors, involve borrowing in a currency with low-interest rates and investing in one with higher rates to capitalize on the interest rate differentialHistorically, Japan’s prolonged ultra-low interest rate environment made the Yen the currency of choice for such strategiesHowever, the tides appear to be changing as the Swiss National Bank (SNB) implements a series of easing measures, creating a competitive landscape in which the Swiss Franc begins to overshadow the Yen.

Analysts are predicting that a series of rate cuts by the SNB may soon lead to a zero-interest-rate policy, thereby enhancing the attractiveness of the Franc for traders looking to benefit from carry operations

Kyle Chapman, a foreign exchange analyst at Baringa Partners, indicates that forthcoming rate cuts could further shift the balanceHe notes the anticipated inflation rate for 2025 is just 0.3%, raising concerns that the inflation target is alarmingly close to the SNB’s lower bound, especially given that inflation expectations have been continually downgraded in each monetary policy meeting throughout the year.

​The essence of carry trading facilitates an environment where economic actors (traders) seek higher yields by employing low-cost financingIn the last decade, Japan’s policy of holding interest rates at record lows positioned the Yen as the favored currency for financing in carry tradesHowever, recent policy shifts from the SNB signal a potential new chapter for the FrancOn December 12, the SNB announced a reduction in its benchmark interest rate from 1.0% to 0.5%. This marked the fourth rate cut of the year, totaling a dramatic 125 basis points—the most significant drop in nearly a decade

The sentiment from SNB Chairman Thomas Jordan further reinforced this policy shift, highlighting the need for more accommodating monetary policy in response to persistent declines in inflation.

This pivot toward a looser monetary stance resulting from the SNB’s decision has significantly lowered the financing costs attached to the Swiss Franc, creating a marked change in trader positioningAccording to data from the Commodity Futures Trading Commission, as of December 17, 2024, speculative net long positions on the Yen stood at a mere 5,961, while net short positions on the Franc soared to 21,800. This stark reversal depicts a rapidly changing market sentiment, a profound transformation from just weeks prior when the Japan was still favored in carry trades.

Market analysts, such as Hans Redeker from Morgan Stanley, pinpoint the decline in financing costs associated with the Swiss Franc as a critical catalyst for renewed interest among carry traders

The previous allure of borrowing in Yen seems to fade, as the traders reposition towards the Franc.

A pertinent question arises: Could we see negative interest rates make a return in Switzerland? The attractiveness of the Swiss Franc as a financing currency is closely linked to its anticipated depreciationThe easing of monetary policy diminishes the Franc's yield appeal while simultaneously elevating its demand as a funding currencyAnalysts widely speculate that the SNB may lower rates even further, potentially re-entering negative territory.

The Swiss consumer price index, which fell from 1.1% in August to 0.7% in November, lends credence to maintaining a lenient policy stanceChairman Jordan reaffirmed that the medium-term goal is to sustain inflation within a range of 0% to 2%. However, he did not dismiss the possibility of reintroducing negative rates if necessary, emphasizing that “negative interest rate policy is not a taboo; we will flexibly adjust our approach based on economic circumstances.”

Further complicating the landscape is the widening gap between U.S

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and Swiss 2-year bond yields, which has expanded to about 4%. This significant yield differential enhances the appeal of strategies that involve selling Swiss Francs to purchase U.Sdollars, attracting traders who seek to exploit these favorable conditionsAccording to researcher Phiotakis from Barclays, the projected depreciation of the Swiss Franc over the coming year will likely offer additional profit spaces for carry traders.

The underlying structure of the Swiss economy also plays a crucial role, especially in its close ties with major European economiesWith its unique geographical and structural characteristics, Switzerland is notably dependent on the economic health of its trade partners, particularly GermanyAs a core engine of the European economy, any downturn in Germany could precipitate severe ramifications for the Swiss economyThe intertwined trade relations mean that a decline in demand from Germany—one of Switzerland's leading trading partners—would likely translate into diminished orders for Swiss exporters, shrinking profits, and ultimately stalling economic growth