Yen Carry Trade Appeal Fades as Swiss Franc and Swedish Krona Emerge as New Funding Currencies
nashnova research
The yen's rally is eroding its role as the world's go-to carry-trade funder. The Swiss franc carry has returned 14% this year, and institutions are shifting funding away from the yen — marking the first structural shake-up in global carry trades in a decade.
What is a carry trade, and why has the yen stopped working?
A carry trade means borrowing in a low-rate currency and buying higher-yielding assets to pocket the difference. For decades the yen was the default funding leg, because Japanese rates sat near zero.
But the Bank of Japan is now signalling rate hikes, and joint US-Japan intervention has pushed the yen higher. The yen's twin advantage — low rates and a weakening trend — is fading.
This means → borrowing costs are rising and the yen itself is appreciating, squeezing the trade from both sides. Shorting the yen has flipped from easy money to a losing bet.
How bad are the losses? What do the numbers show?
In the first half of this year, the classic sell-yen / buy-Aussie carry earned 9%. Since July, the same trade has lost 1.3%.
By contrast, a carry trade funded in Swiss francs has returned 14% for 2026 so far.
In plain terms = same idea, same destination currency — just swap which currency you borrow. That single switch turned a loss into a double-digit gain. The choice of funding currency matters more than the direction call.
Why the Swiss franc? What makes it the heir to the yen?
Russell Investments and Allianz Global Investors both favour the franc. The core logic: Swiss and Japanese monetary policy are heading in opposite directions. Switzerland is expected to hold rates at zero through end-2027; Japan is laying the groundwork for hikes.
Swiss authorities appear comfortable with a weaker franc to help exporters. Japan, by contrast, has intervened in FX markets twice, signalling it wants a stronger yen.
This means → the franc now ticks both boxes — low rates and official tolerance of depreciation — filling the exact gap the yen is vacating.
Van Luu, head of global fixed income and FX strategy at Russell Investments, said: "On valuation, monetary policy, and exchange-rate policy, the franc is the most attractive funding currency."
What about the Swedish krona and the Canadian dollar?
Meera Chandan, co-head of global FX strategy at JPMorgan, recommends the Swedish krona and the Canadian dollar as funding currencies. Both have low yields and high sensitivity to the economic cycle, making them the most vulnerable in a rising-rate world.
She suggests shorting both against the US dollar, which is supported by expectations of two Fed rate hikes this year.
In plain terms = JPMorgan's playbook is: borrow in the currencies with the lowest rates and the weakest defences against rate hikes, then buy the currencies with the highest rates and the strongest resilience. The krona and loonie fit that profile.
What are the risks of switching funding currencies?
The yen's liquidity still dwarfs most peers. In plain terms = the yen market is "deep" — large orders move in and out without much slippage. The franc market is comparatively "shallow."
The franc is a major safe-haven asset. In a geopolitical shock, it tends to surge. Greg Hirt, multi-asset CIO at Allianz Global Investors, flagged next year's Italian and French elections as a volatility risk: "If something goes wrong in France, the franc will rally sharply."
This means → funding a carry trade in francs works well in calm markets. But in a risk-off event, a franc spike can wipe out months of carry income overnight.
Can this shift last? What should we watch?
Whether the funding-currency rotation sticks depends on two variables: the actual pace of Bank of Japan rate hikes, and how long the market believes Swiss authorities will tolerate franc weakness.
This reflects a deeper signal: global carry trades are moving from a "default to the yen" single-currency structure toward a multi-currency funding model — for the first time in a decade.
Neil Jones, managing director of FX sales and trading at TJM London, described the sell-franc / buy-yen trade as "largely reflecting a long-term structural shift in funding currencies."
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