Yen Carry Trade Shows Resilience as Investors Shift to Euro and Swiss Franc for Funding
Alina Collins
After the joint US-Japan yen intervention, global carry trades avoided the mass unwind many feared — Bloomberg's carry risk index fell just 1%, far below the 4% drop during August 2024's yen spike. The reason: investors have diversified funding currencies away from the yen toward the euro and Swiss franc, meaning no single currency shock can blow up the trade.
Why didn't the carry trade blow up after the intervention?
Bloomberg's EM FX carry risk premium index has fallen only about 1% since the intervention — roughly matching the G10 benchmark decline. This means → no panic unwind materialized.
Compare August 2024: the yen surged, the index plunged 4%, and global markets convulsed. In plain terms = same trigger, one-quarter of the damage.
The Brazilian real tells the story most clearly: it dropped about 4% against the yen but held nearly flat against the dollar and fell just 0.8% against the euro. This reflects funding-currency diversification already absorbing the yen's appreciation shock.
What's replacing the yen? Which funding currencies are institutions choosing?
Goldman Sachs said last month that carry trades face the best conditions in over two decades. Its preferred DM funding currencies, in order: Swiss franc, euro, Canadian dollar — the yen is not on the list.
Morgan Stanley told clients this week that the threat of further yen intervention supports the euro and Swiss franc as "preferred funding currencies." This means → the sell-side consensus has shifted: yen funding is losing its edge.
The ECB benchmark rate sits at 2.25%, below the Fed's 3.5%–3.75% target range. In plain terms = borrowing in euros is cheaper than borrowing in dollars, which opens a wider carry spread and naturally pulls capital toward euro-funded trades.
How much has the carry trade earned this year?
One of the best-performing combinations — borrowing euros to buy Brazilian real, Colombian peso, and Turkish lira — has returned about 19% year-to-date, the highest for that period since 2005.
Standard Chartered's head of G10 strategy, Steven Barrow, wrote: "Can it keep outperforming? We see no reason why not. This trade seems impervious to any potential setback."
Vontobel portfolio manager Thierry Larose said he will keep carry positions but avoid shorting the yen. This means → the professional stance is "keep earning, but stop betting on yen weakness."
Who is betting against the crowd — going long yen?
Wells Fargo is running the opposite trade: short the low-yielding Swiss franc, long the yen. The thesis is that Japan's gradual policy shift will keep yen yields above franc yields. Target: roughly 188, implying about 4% downside.
In plain terms = Wells Fargo's logic is that Japan will eventually hike rates, pushing yen yields past the franc's — so position now.
This reflects a market that is not uniformly bearish on the yen — the disagreement centers on how fast the Bank of Japan will tighten.
Can this diversified setup last? Where is the key risk?
Citi strategist Daniel Tobon noted the current landscape is "completely different" from the pre-August 2024 world where "everything was funded in yen." Investors can also borrow Australian dollars to fund long positions in currencies like the real.
But some carry trades still use yen funding. A sustained yen rally could still trigger a larger unwind.
Whether the Bank of Japan hikes in September is the critical test of whether this diversified setup holds. This means → the funding base has broadened, but the yen "mine" has not been fully defused.
Content is for reference only, not financial advice.