EBC Markets Briefing | Swiss franc carry trades could blow up

The Swiss franc eased on Tuesday. As investors turn to the Swiss franc as an alternative to Japan's yen to fund carry trades, the risk of the currency staging one of its rapid rallies remains ever present.

Its appeal has brightened further as the yen's has dimmed. Yen carry trades imploded in August after the currency rallied hard on weak US economic data and a surprise BOJ rate hike.

The SNB was the first major central bank to kick off an easing cycle earlier this year and has cut interest rates twice. Analysts expect more reductions in the coming months as inflation kept grinding lower.

Speculators have held on to a $3.8 billion short position against the currency even as they have abruptly moved to a $2 billion long position on the yen, CFTC shows. Yet there are risks to take the bet.

Investors are prone to the influx into the currency when they get nervous, which was exemplified by its big gains amid market turmoil last month. The Swiss franc hit a record high around 180 in July against the yen.

The annual inflation rate in Switzerland stood at 1.3% in July 2024, in line with market expectations. Meanwhile, Japan swathe growth at 2.8% over the same period, remaining at its highest level since February.

The Swiss franc traded above 200 SMA against the yen with the initial resistance at 175. We see the pair likely consolidate around 172 in the short term, unless the Swiss data due later in the day surprise.

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